Project report

On
“A Study Of Bombay Stock Exchange”

Submitted In Partial Fulfillment Of Requirement for Bachelors Of Commerce In

Honors (B.Com Hons)

GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY

B.Com Hons ,2ndSemester (Evening)

Batch – 2017- 2020

SUBMITTED TO: SUBMITTED BY-

Ms.Annu Mishra Shubham Mann
Assistant Professor Roll No.41124588817

JAGANNATH INTERNATIONAL MANAGEMENT SCHOOL

KALKAJI, NEW DELHI

-1-
 STUDENT’S UNDERTAKING

.
The project on “A Study Of Bombay Stock Exchange” is completed under the guidance of Ms.
Annu Mishra, Assistant Professoris the original work by me and it has never been submitted
elsewhere.

Shubham Mann
Roll No.41124588817

-2-
 CERTIFICATE

This is to certify that Mr.Shubham Mann is a bonafide student of this institute. (Batch – 2017-20),
who has undertaken this project work entitled “A Study Of Bombay Stock Exchange”

Under my supervision and guidance for the partial fulfillment of theB.Com(Hons).

As per best of my knowledge this Research project work is an original piece of work and has not
been copied or published elsewhere.

I wish him all the best for his bright future ahead.

(Ms.Annu Mishra)
Project Guide

-3-
 ACKNOWLEDGEMENT

I thank Ms.Annu Mishra for providing the foundation for this study. The structure, the focus and the
direction for the successful completion of this project were provided by her, and had it not been for
the clarity that he provided, this dissertation report would not have been possible.
Mam was always a guiding light of this study right from the word go. She gave me certain insights
which have proved to be very useful for me while I went about doing this study.
I wish to express my heartfelt gratitude to all the faculty and staff members who have been
associated with this study in many small and big ways.
I also wish to express my gratitude to the esteemed respondents of my research for their co-
operation and support.
Last but not the least; I thank my worthy friends and family members who have constantly been
encouraging and supporting me through out the various stages of this study.

SHUBHAM MANN
01924588817

-4-
 CERTIFICATION BY SUPERVISOR

I hereby certify that Mr.Shubham Mann has completed the project under my guidance on the title
“A study of Bombay Stock Exchange”.

Name of Supervisor: Student Name:

Ms.Annu Mishra Shubham Mann

Assitant Professor 01924588817

-5-
 INDEX

CONTENTS PAGE NUMBER

Chapter 1 : Introduction To The Topic 7

Chapter 2 : Company Profile 13

Chapter 3 : Objectives 28

Chapter 4 : Research Methodology 30

Chapter 5 : Analysis & Findings 32

Chapter 6 : Limitations 65

Chapter 7: Recommendations& Conclusions 67

Chapter 8: Appendices 69

Chapter 9 : Bibliography 73

-6-
Chapter 1: INTRODUCTION TO THE TOPIC

-7-
 Executive Summary
The sharp swings in global markets recently have rocked Indian markets leaving investors
nervous. To put matters in context, stock markets should continue their role as allocator of capital
for most productive uses. Retail investors whose money is being invested should get a fair chance
to create wealth proportionate to their risk taking appetite. Regulators should ensure fair play,
control systemic risks and penalize fraud. The process of long term wealth creation should not
become hostage to the avarice of a few short term speculators. The stock market is a barometer
of the future wealth creation capacity of the industrial enterprise system. In whatsoever manner
the industrial enterprise system and the stock markets are evolving, these things remain the same.

Given that, why do individual stocks show volatile price movements? A stock price moves up or
down depending on whether for that day or for that period supply exceeds demand or vice versa. It
is this fragile balance in supply and demand which would determine the price movements for a
stock and in aggregate terms the price movement for a group of stocks or for the stock market as
a whole.

Individual stocks can be volatile if, there is extremely positive or negative information for that
particular stock which is available to traders. Or, prices may swing if a group of traders collude, to
create artificial scarcity or demand for a stock. Finally, price movements may happen, if at a macro
level, there is national or international news which has some impact on some stocks or the entire
market.

The current volatility is the outcome of all these factors acting together, like Newton’s Laws. Stock
prices move as a function of all the above mentioned factors. What’s new now is how the process
of global knowledge dissemination has expanded and the reduced cost of stock market
transactions for individuals. Thanks to IT, individuals across the globe have access to information
almost simultaneously. Technology has also made transactions easier and cheaper. More
information and ease of transactions mean that Mr Sure Shot Singh in Jalandhar wants to sell or
buy depending on what Mr John Brown is doing in Manchester. Two decades ago, Indians used to
stay up past midnight to hear or see what Sunil Gavaskar was doing on the cricket fields of Lords.
Now they stay up to watch what the Nasdaq is doing. Information on factors affecting price
movements is available to more people and they are able to act quicker, leading to steep swings in
prices.

While IT has accentuated short term movements, its medium term impact is salutary. Information
removes imperfections and lets people align investments with risks. Collusion becomes difficult,
regulation easier and systemic risks are reduced. Despite the turbulence long term investors have
made good returns in the past,astheywillinfuture.

Let us be clear in our minds that equity stocks and equity mutual funds offer a way of long term
financial life cycle planning. People who have invested in these over a long period have obtained
excellent returns. People who invest in stock markets based on tabloid advice and with the greed
of overnight returns are not investors but speculators. They can, and do get, burnt. For all the

-8-
essays we may write and all that market regulators might try to do, no one can protect a
speculator against himself.
With the integration of our stock markets with international markets, the rules of the game have
changed. No one influence can guide the short term movements in the stock markets. As
investors, we have to learn to live with volatility.

One of the major factors causing today’s volatility is the unanimity in investors’ inclination towards
new economy stocks and their shunning of old economy stocks. This has led to a huge
polarization in the markets. Today’s markets are characterized by large investment flows into
companies with emerging businesses -- which typically have low floating stock -- leading to wild
price swings.

Volatility has gone up as actively managed funds churn their portfolios more often. This gets
exacerbated by momentum investing by day traders and fund managers. Soon, stocks are not
bought on the basis of their fundamental value but on the greater fool theory.

Unrealistic investor expectations driven by the recent history of the boom in IT stocks is a cause
for concern: now, the quality of the stock and fundamentals are ignored in a market characterised
by daily assessment of profits and losses. Recent price history clouds the investors’ minds so
much that they start treating that price as the real value of the stock and don’t take a longer
perspective of the company.

The volatility in new economy stocks reflects systemic changes taking place in the underlying
businesses. In the boardrooms of companies, long gone are the months of planning and debate
on capital allocation, mergers/acquisitions and joint ventures. In the Internet age, a three month
delay can be the difference between success and failure. Also, we are now in an age when
companies can think of becoming multinationals in a short span (e.g. Yahoo, Amazon), when
established age old companies see their fortunes dip very fast (e.g. Britannica) and when
companies can go boom and then come tumbling down in a couple of years (e.g. Netscape).
When businesses are witnessing such rapid stratospheric booms and busts, it is natural to expect
their stocks to be volatile.

In times of extreme volatility, investments in diversified equity funds offer a hedge against stock
specific risk. The regulator should leave the pricing of the stocks to markets and its play on fear
and greed, but should come down heavily on rigging induced volatility. It should clamp down on
insider trading and selective information leaks. Information dissemination when done timely and
uniformly to all investors would bring in transparency and should help arrest volatility to some
extent.
Volatility in stock markets is a global phenomenon. More and more people are getting lured by the
phenomenal, albeit unsustainable, returns (especially in the long run), which some stocks have
seen in the recent past. This is especially true of tech stocks. Even as Iwrite this, markets world
over have tumbled, with the dot-com and tech stock-plunge causing some panic among investors.

There are as many as 10 million day traders in the US. While no such statistic is available for

-9-
India, my guesstimate is that this number should be quite high given that close to 80 to 90 per cent
of trades in the two main exchanges, BSE and NSE, are carried forward or squared off
respectively. This is a sign of the times, that “get rich quick” attitude presently in existence among
the younger lot in India.

Two, privatise insurance as soon as possible; allow insurance companies to invest a larger
percentage of their corpus in the stock markets.

Three, allow institutions, banks and mutual funds to participate in badla financing.
Four, introduce as soon as possible index based futures; after the initial teething period and once
the index based futures market stabilises, consider doing away with badla.
Once the index and futures market is stabilised, serious thought should be given to uniform
settlement across the stock exchanges. Once these reforms take hold, futures markets are
stabilised, then rolling settlement should be considered and phased in, for more and more scrips.

In the immediate future, thought should be given to reducing the eight per cent circuit filter
presently in operation on a scrip wise basis.

Once the index and futures markets truly develop, the circuit filter should be looked at for the
market as a whole and not at a scrip level.
Stock index represents a portfolio of stocks and stock index futures is a standardized contract of
buying and selling of portfolio of stocks represented by the stock index.

Stock indexes have been part of investment cultures for more than 100 years, but futures contract
on them did not begin until 1980’s. These contracts continue to develop as the markets enter the
twenty-first century. Nearly three-dozen countries have developed stock index derivatives products
and the largest economies in the world have several derivatives, trading on different indexes
available in their country.

While the rest of the world progressed rapidly on the derivative front, Indian market lagged behind.
Until recently Indian equity market was totally devoid of derivatives though some varieties of them
have been in existence in the money market. However, the debt market is small and inactive and
does not provide a wide range of investment choices to investors to enable them to design
portfolios to match their risk-return preferences.

It was in May 1998 that SEBI accepted the recommendations made by L.C.Gupta committee on
derivatives trading in India. Subsequently SEBI appointed J.R.Verma Committee to look into the
operational aspects of derivatives marketsi.

The Securities Laws (Amendment) Bill 1999 was introduced to bring about the much-needed
changes. In December 1999, the new framework was approved. Derivatives were accorded the
status of ‘securities’ and the ban imposed on trading in derivatives by the Central Government was
revoked.

- 10 -
 ABOUT BOMBAY STOCK EXCHANGE (BSE)

INTRODUCTION

The Stock Exchange, Mumbai which was established in 1875 as "The Native Share and
Stockbrokers Association" (a voluntary non-profit making association), has evolved over the
years into its present status as the premier Stock Exchange in the country. It may be noted that
the Stock Exchange is the oldest one in Asia, even older than the Tokyo Stock Exchange, which
was founded in 1878.

It is the first stock exchange in the country to obtain permanent recognition in 1956 from the
Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal
and pre-eminent role in the development of the Indian capital market is widely recognized and its
index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is
now a demutualised and corporatised entity incorporated under the provisions of the Companies
Act, 1956, pursuant to the BSE(Corporatisation and Demutualisation) Scheme, 2005 notified by
the Securities and Exchange Board of India (SEBI).

The Stock Exchange, Mumbai (BSE) is generally referred to as the Gateway to the capital market
in India. It is a lynch-pin of the Indian Capital market. Its governing board and administration are
keenly aware of the future needs of the exchange to maintain its lead role. As Indian economy is
opening up, the Exchange has brought its operations at par with international standards. It is
poised to take advantage of changes in Indian economic deregulation to expand the market and
make the security market, in India, more transparent and more liquid.
However, the objectives and the role of the Stock Exchange, Mumbai has remained the same as
enunciated by our founding fathers and given to us as a mandate in 1887 through the charter.

Objectives Of BSE

1. To safeguard the interest of investing public having dealings on the Exchange and the
members.
2. To establish and promote honorable and just practices in securities transactions.
3. To promote, develop and maintain a well regulated market for dealing in securities.
4. To promote industrial developments in the country through efficient resource mobilisation
by way of investment in corporate securities.

Awards

The World Council of Corporate Governance has awarded the Golden Peacock Global CSR

- 11 -
 Award for BSE's initiatives in Corporate Social Responsibility (CSR).
The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31
2007 have been awarded the ICAI awards for excellence in financial reporting.
The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts
in employer branding through talent management at work, health management at work and
excellence in HR through technology

Drawing from its rich past and its equally robust performance in the recent times, BSE will
continue to remain an icon in the Indian capital market.

- 12 -
CHAPTER 2:COMPANY PROFILE

- 13 -
 Vision
"Emerge as the premier Indian stock exchange by establishing global benchmarks"

Board of Directors

The Exchange while providing an efficient market also upholds the interests of the investors and
ensures redressal of their grievances, whether against the companies or its own member-brokers.
It also strives to educate and enlighten the investors by making available necessary informative
inputs.

A Governing Board comprising of 9 elected directors (one third of them retire every year by
rotation), an Executive Director, three Government nominees, a Reserve Bank of India nominee
and five public representatives, is the apex body which regulates the Exchange and decides its
policies.

A President, Vice-President and an Honarary Treasurer are annually elected from among the
elected directors by the Governing Board following the election of directors.

The Executive Director as the Chief Executive Officer is responsible for the day-to-day
administration of the Exchange.

Board Of Directors
Chairman Mr. Shri S. Ravi

MD & CEO Ms. Devika Shah

Sumit Bose
Public Interest Director

S SMundra
Public Interest Director

Vikramajit Sen
Public Interest Director

- 14 -
 Roland Schwinn
Shareholder Director

Usha Sangwan
Shareholder Director

Ms. RajeshreeSabnavis
Shareholder Director

. Mr.Sriprakash Kothari
Shareholder Director

Management Team

Sr. No. Name Designation

1. Mr. NehalVora Chief Regulatory Officer

2. Mr. Nayan Mehta Chief Financial Officer
3. Mr. KersiTavadia Chief Information Officer
4. Mr. NeerajKulshrestha Chief of Business Operations
5. Mr.Sriprakash Kothari Shareholder Director
6. Mr.Roland Schwinn Shareholder Director
7. Ms. RajeshreeSabnavis Shareholder Director
8. Ms.UshaSangwan Shareholder Director
9. Mr.TusharAmbani Chief Operating Officer

- 15 -
10. Ms.MynaVenkatraman Chief Financial Officer
11. Mr.PiyushChourasia Chief Risk Officer & Head-Strategy

BSE-On-Line-Trading (BOLT)

The Exchange has obtained permission from Securities and Exchange Board of India (SEBI) for
expansion of its BSE-On-Line-Trading (BOLT) network to locations outside Mumbai. In terms of
the permission granted by SEBI, the members of the Exchange are free to install their trading
terminals to cities where there are no Stock Exchanges. However, at centres where the other
Exchanges are located, the Exchange is required to sign a Memorandum of Understanding with
these Exchanges permitting it to install the BOLT terminals in their jurisdictional areas.

With demutualisation, the trading rights and ownership rights have been de-linked effectively
addressing concerns regarding perceived and real conflicts of interest. The Exchange is
professionally managed under the overall direction of the Board of Directors.The Board comprises
eminent professionals, representatives of Trading Members and the Managing Director of the
Exchange. The Board is inclusive and is designed to benefit from theparticipation of market
intermediaries.

In terms of organisation structure, the Board formulates larger policy issues and exercises over-all
control. The committees constituted by the Board are broad-based. The day-to-day operations of the
Exchange are managed by the Managing Director and a management team of professionals.

The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The
systems and processes of the Exchange are designed to safeguard market integrity and enhance
transparency in operations. During the year 2004-2005, the trading volumes on the Exchange
showed robust growth.

The Exchange provides an efficient and transparent market for trading in equity, debt instruments
and derivatives. The BSE's On Line Trading System (BOLT) is aproprietory system of the
Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of
the Exchange are ISO 9001:2000 certified.

The expansion of BOLT network was inaugurated by the then Finance Minister, Government of
India, Shri P. Chidambaram on August 30, 1997. The Exchange has signed Memorandum of
Understanding with eleven Stock Exchanges, viz., Calcutta, Pune, Ahmedabad, Saurashtra-Kutch
(Rajkot), Madhya Pradesh, Vadodara, Bhubaneshwar and Magadh (i.e., Patna), Jaipur,
Coimbatore & Chennai (Madras) to provide BOLT connections to the members of these
Exchanges after obtaining necessary clearance from SEBI. The BOLT network has been
expanded to centres outside Mumbai and covers 227 centres having 672 V-SATs (Very Small
Aperture Terminals) and 949 TWSs (Trader Work Stations) as on August 31, 2012. Of these, 595
V-SATs and 807 TWSs respectively are installed outside Mumbai.

- 16 -
With the expansion of BOLT outside Mumbai, the average daily turnover at the Exchange has
increased from Rs. 1064 crores in August 2010 to Rs. 1404 crores in April 1998 and further to Rs.
2273 crores in August 2012
The average daily turnover at the Exchange has increased from Rs.851 crores in 2008-09 to Rs.
1284 crores in 2009-10 and further to Rs. 2273 in 2010-11 (April – August 2011).

Heritage

The oldest exchange in Asia and the first exchange in the country to be granted permanent
recognition under the Securities Contract Regulation Act, 1956, Bombay Stock Exchange Limited
(BSE) has had an interesting rise to prominence over the past 130 years.
While the BSE is now synonymous with Dalal Street, it wasn’t always so. In fact the first venues of
the earliest stock broker meetings in the 1850s were amidst rather natural environs - under banyan
trees - in front of the Town Hall, where Horniman Circle is now situated. A decade later, the brokers
moved their venue to another set of foliage, this time under banyan trees at the junction of Meadows
Street and Mahatma Gandhi Road. As the number of brokers increased, they had to shift from place
to place, and wherever they went, through sheer habit, they overflowed in to the streets. At last, in
1874, found a permanent place, and one that they could, quite literally, call their own. The new place
was, aptly, called Dalal Street.
The journey of BSE is as eventful and interesting as the history of India’s securities markets. India’s
biggest bourse, in terms of listed companies and market capitalization, BSE has played a pioneering
role in the Indian Securities Market - one of the oldest in the world. Much before actual legislations
were enacted, BSE had formulated comprehensive set of Rules and Regulations for the Indian
Capital Markets. It also laid down best practices adopted by the Indian Capital Markets after India
gained its Independence.
Perhaps, there would not be any leading corporate in India, which has not sourced BSE’s services in
resource mobilization.
BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the benchmark
equity index that reflects the robustness of the economy and finance. At par with international
standards, BSE has been a pioneer in several areas. It has several firsts to its credit even in an
intensely competitive environment.

 First in India to introduce Equity Derivatives

 First in India to launch a Free Float Index
 First in India to launch US$ version of BSE Sensex
 First in India to launch Exchange Enabled Internet Trading Platform
 First in India to obtain ISO certification for Surveillance, Clearing & Settlement
 'BSE On-Line Trading System’ (BOLT) has been awarded the globally
recognized the Information Security Management System standard
BS7799-2: 2002.
 First to have an exclusive facility for financial training
 Moved from Open Outcry to Electronic Trading within just 50 days

- 17 -
An equally important accomplishment of BSE is the launch of a nationwide investor awareness
campaign - Safe Investing in the Stock Market - under which nationwide awareness campaigns and
dissemination of information through print and electronic medium was undertaken. BSE also actively
promoted the securities market awareness campaign of the Securities and Exchange Board of India.
In 2002, the name The Stock Exchange, Mumbai, was changed to BSE. BSE, which had introduced
securities trading in India, replaced its open outcry system of trading in 1995, when the totally
automated trading through the BSE Online trading (BOLT) system was put into practice. The BOLT
network was expanded, nationwide, in 1997. It was at the BSE's International Convention Hall that
India’s 1st Bell ringing ceremony in the history Capital Markets was held on February 18th, 2002. It
was the listing ceremony of Bharti Tele ventures Ltd.
BSE with its long history of capital market development is fully geared to continue its contributions to
further the growth of the securities markets of the country, thus helping India increase its sphere of
influence in international financial markets.
For the premier Stock Exchange that pioneered the stock broking activity in India, 125 years of
experience seem to be a proud milestone. A lot has changed since 1875 when 318 persons became
members of what today is called "Bombay Stock Exchange Limited" by paying a princely amount of
Re1.

BSE-SENSEX, first compiled in 1986 is a "Market Capitalization-Weighted" index of 30 component

stocks representing a sample of large, well-established and financially sound companies. The base
year of BSE-SENSEX is 1978-79. The index is widely reported in both domestic and international
markets through print as well as electronic media. BSE-SENSEX is not only scientifically designed
but also based on globally accepted construction and review methodology. The "Market
Capitalization-Weighted" methodology is a widely followed index construction methodology on which
majority of global equity benchmarks are based.
The growth of equity markets in India has been phenomenal in the decade gone by. Right from early
nineties the stock market witnessed heightened activity in terms of various bull and bear runs. More
recently, the bourses in India witnessed a similar frenzy in the 'TMT' sectors. The BSE-SENSEX
captured all these happenings in the most judicial manner. One can identify the booms and bust of
the Indian equity market through BSE-SENSEX.
The launch of BSE-SENSEX in 1986 was later followed up in January 1989 by introduction of BSE
National Index (Base: 1983-84 = 100). It comprised of 100 stocks listed at five major stock
exchanges in India at Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index
was renamed as BSE-100 Index from October 14, 1996 and since then it is calculated taking into
consideration only the prices of stocks listed at BSE.
The Exchange also disseminates the Price-Earnings Ratio, the Price to Book Value Ratio and the
Dividend Yield Percentage on day-to-day basis of all its major indices.

- 18 -
The values of all BSE indices (except the Dollar version of indices) are updated every 15 seconds
during the market hours and displayed through the BOLT system, BSE website and news wire
agencies.
All BSE-Indices are reviewed periodically by the "Index Committee" of the Exchange. The committee
frames the broad policy guidelines for the development and maintenance of all BSE indices. The
Index Cell of the Exchange carries out the day to day maintenance of all indices and conducts
research on development of new indices.

LISTING OF SECURITIES

Listing means admission of the securities to dealings on a recognized stock exchange. The
securities may be of any public limited company, Central or State Government, quasi
governmental and other financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to:
 provide liquidity to securities;
 mobilize savings for economic development;
 protect interest of investors by ensuring full disclosures.
The Exchange has a separate Listing Department to grant approval for listing of securities of
companies in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956,
Securities Contracts (Regulation) Rules, 1957, Companies Act 1956, Guidelines issued by SEBI
and Rules, Bye-laws and Regulations of the Exchange.
A company intending to have its securities listed on the Exchange has to comply with the listing
requirements prescribed by the Exchange, which are as under:

[I] New Companies

a. Minimum Capital: New companies can be listed on the Exchange, if their Issued
& Subscribed Equity Capital after the public issue, is Rs.10 crores and above.
b. Minimum Public Offer: As per Rule 19(2) (b) of the Securities Contracts
(Regulation) Rules, 1957, securities of a company can be listed on a Stock
Exchange only when at least 25% of each class or kind of securities is offered to
the public for subscription. For this purpose, the term "offered to the public"
means only the portion offered to the public and does not include reservations of
securities on firm or competitive basis.
SEBI may, however, relax this condition on the basis of recommendations of stock
exchange(s), only in respect of a Government company defined under Section 617 of
the Companies Act, 1956.

[II] Companies listed on other stock exchanges

The companies listed on other Stock Exchanges and seeking listing on this Exchange are
required to fulfill the following criteria:
 Minimum Issued Equity Capital of Rs.3 crores to Rs.10 crores;

- 19 -
  Profit track record for at least three years;
 Minimum Market Capitalization of Rs.20 Crores, based on average price of
last six months;
 Trading for a minimum 50% of the total trading days during the same six
months on any stock exchange;
 Minimum average volume traded per day during the last three complete
months should be 500 shares and minimum 5 trades per day;
 25% of the issued capital should be with public (including body corporate) and
minimum 15 shareholders per Rs. 1 lakh of capital in the public category.

[III] Companies de-listed by this Exchange seeking re-listing on this Exchange

The companies de-listed by this Exchange and seeking re-listing are required to have a
minimum Issued & Subscribed Equity Capital of Rs.10 crores

Compliance with Listing Agreement

The companies desirous of getting their securities listed are required to enter into an agreement
with the Exchange called the Listing Agreement and they are required to make certain disclosures
and perform certain acts. As such, the agreement is of great importance and is executed under the
common seal of a company. Under the Listing Agreement, a company undertakes, amongst other
things, to provide facilities for prompt transfer, registration, sub-division and consolidation of
securities; to give proper notice of closure of transfer books and record dates, to forward copies of
unabridged Annual Reports and Balance Sheets to the shareholders, to file Distribution Schedule
with the Exchange annually; to furnish financial results on a quarterly basis; intimate promptly to
the Exchange the happenings which are likely to materially affect the financial performance of the
Company and its stock prices; etc.
The Listing Department of the Exchange monitors the compliance of the companies with the
provisions of the Listing Agreement, especially with regard to timely payment of annual listing fees,
submission of quarterly results, requirement of minimum number of shareholders, etc. and takes
penal action against the defaulting companies.

"Z" Group
The Exchange has introduced a new category called "Z Group" from July 2009 for companies who
have not complied with and are in breach of provisions of the Listing Agreement. The number of
companies placed under this group as of August 31, 2009 are 293.

One Window Clearance

Since April 1997, the Exchange has introduced the concept of "One Window Clearance" for listing
of public issue of securities of companies, by allocating the companies’ public issues
alphabetically amongst the Exchange officials. A company is served by one official of the Listing
Department during the entire process of listing of its securities, commencing from approval of its
Memorandum and Articles of Association upto granting of trading permission for its securities and
release of 1% security deposit.

- 20 -
The number of companies listed at the Exchange as on August 31, 2009 was 5852. This is the
highest number among the Stock Exchanges in the country.

TRADING

The Exchange has switched over from the open outcry trading system to a fully automated
computerized mode of trading known as BOLT (BSE On Line Trading) System. This system,
which is both order and quote driven, was commissioned on March 14, 2005. It facilitates more
efficient processing, automatic order matching and faster execution of trades. Above all, the
system is more transparent. The members now enter orders/quotes on their Trader Work Stations
(TWSs) in their offices instead of assembling in the trading ring.

The scrips traded on the Exchange have been classified into ‘A’, ‘B 1’, ‘B2’, ‘C’ ’F’ and ‘Z’ group.
The number of scrips listed on the Exchange under ‘A’, ‘B 1’ and ‘B2’ groups which represent the
equity segments as on August 1999 was 149, 1116 and 4740 respectively. The ‘F’ group
represents the debt market (fixed income securities) segment wherein 650 securities were listed
as at the end of August 2009. The 'Z’ group comprises of 293 scrips as of August 2009. The ‘C’
group covers the odd lot securities in ‘A’, ‘B1’ & ‘B2’ groups and Rights renunciations.

The Stock Exchange, Mumbai, is the only Stock Exchange in the country to provide a facility of on-
line trading in odd lot securities and Rights renunciations. This facility of trading in odd lots of
securities and Rights renunciations not only offers an exit route to investors to dispose of their odd
lot of securities but also provides them an opportunity to consolidate their securities into market
lots. Trading in this segment covers all the scrips listed in the equity segment.The trading cycle for
all these groups of securities is weekly.
The trading cycle for ‘A, B1, B2’ and ‘C’ group securities representing the physical segment is from
Monday to Friday and that for ‘F’ group securities is from Thursday to Wednesday. The
transactions in ‘A’ group scrips are allowed to be carried forward from one settlement to another
settlement subject to a maximum of 75 days from the date of original transaction. The Stock
Exchange, Mumbai is the first Exchange in the country to provide the facility of carry-forward of
outstanding positions in ‘A’group scrips. The trading session for carry forward of transactions from
one settlement to another is conducted on Saturdays, i.e., at the end of every trading cycle in the
physical segment.

Trading on the BOLT system is conducted from Monday to Friday between 10:00 a.m. and 3:30
p.m. while the carry-forward session for ‘A’ group securities is conducted on Saturdays between
10:00 a.m. to 12:30 p.m. The Information Systems Department of the Exchange generates the
following statements which can be downloaded by the members in their back offices on a daily
basis :

a. statements giving details of the daily transactions entered into by the members.
b. statements giving details of margins payable by the members in respect of the trades
executed by them.

- 21 -
 The members are allowed to enter into transactions on behalf of their Institutional clients,
viz., Scheduled Commercial Banks, Indian Financial Institutions (IFIs) & Foreign
Institutional Investors (FIIs) and Mutual Funds registered with SEBI. The settlement of the
trades (money and securities) done on behalf of the Institutions may be either through the
member himself or through a SEBI registered Custodian appointed by an Institution. In case
the delivery/payment is to be given or taken by a Custodian on behalf of an Institution, the
former has to confirm the trade done by a member. For this purpose, the Custodians have
been admitted as members of the Clearing House. In case an institutional transaction is
notconfirmed by the Custodian, the liability for pay-in of funds or securities devolves on the
concerned member.

SETTLEMENT AND CLEARING

Pay-in and Pay-out for "A, B1, B2’ & ‘C’ group of securities
The trades done by the members during the weekly trading period from Monday to Friday are
settled by payment of money and delivery of securities in the following week. All deliveries of
securities are required to be routed through the Clearing House, except for certain off-market
transactions which, although are required to be reported to the Exchange, may be settled directly
between the members concerned.
The Information Systems Department of the Exchange nets off all deliverable trades (purchases
and sales in each scrip) done by a member during a settlement and generates delivery/receive
orders and money statements which are downloaded by the members in their back offices.

The delivery orders provide information like scrip, quantity and the name of the receiving member
to whom the securities are to be delivered through the Clearing House. The Money Statement
provides details of payments/receipts for the settlement.

Earlier the members were required to submit along with the balance sheet (Form 31-A) which
includes the details of Money Statement, margins payable/receivable, and other credits/debits
arising out of auction for shortages, objections, bad delivery, etc., a cheque /draft depending on
whether the settlement liability is a payable or receivable position on Thursday, i.e., pay-in day.
However, with effect from December 22, 2007 (i.e., Sett.No.39/07-08), the bank accounts of
members maintained with Bank of India, Stock Exchange Branch, the only clearing bank at that
time, were directly debited through computerised posting on the pay-in day for their settlement
dues. The list of clearing banks has since been expanded to include HDFC Bank Ltd., Global Trust
Bank Ltd. and Standard Chartered Bank. Thus, the members are no longer required to submit
physical Form 31-A and cheque/draft as was the earlier practice.

The securities, as per delivery orders issued by the Exchange, are to be delivered in the Clearing
House on the day designated for pay-in ,i.e., on Wednesday and Thursday as per prescribed time
slots upto 1:00 p.m. No late delivery of shares is permitted. Members have to deliver the securities
in special closed pouches issued by the Exchange along with the relevant details (distinctive

- 22 -
numbers, scrip code, quantity, receiving member) on a floppy. The data submitted by the
members on floppies is matched against the master file data on the Clearing House computer
systems. If there are no discrepancies, then a scroll number is generated and a scroll slip is
issued. The members then submit the securities at the receiving counter. The Clearing House
personnel arrange and tally the securities received against the receiving memberwise report
generated on the Pay-in day. Once this reconciliation is complete, the bank accounts of members
having pay-in positions are debited on Thursday. This procedure is called Pay-in. The Receiving
Members collect securities on Friday and the accounts of the members having pay-out are
credited on Saturday. This is referred to as Pay-out.

Auction is conducted for those securities which members fail to deliver/short deliver during the
Pay-in. In case the securities are not received in an auction, the positions are closed out as per
the close-out rate fixed by the Exchange in accordance with the prescribed rules. The close out
rate is calculated as the highest rate of the scrip recorded in the settlement in which the trade was
executed or in the subsequent settlement upto the day prior to the day of auction or 20% above
the closing price on the day prior to the day of auction, whichever is higher.

The settlement schedules for various groups of securities have been strictly adhered to by the
Exchange and there has been no case of clubbing of settlements or postponement of pay-in and
pay-out during the last over three years.

The Exchange is also maintaining a database of fake/forged/stolen securities with the Clearing
House so that distinctive numbers submitted by members on delivery may be matched against the
database to weed out bad paper from circulation.

INTRODUCTION OF THE DEMAT SEGMENT

The Exchange has commenced trading in the Dematerialised (Demat) segment with effect from
December 29, 2007 where there is no physical delivery of securities as in the physical segment.
Trading in the Demat segment is on a Rolling Settlement basis (T+5) where T stands for Trade
Day. The pay-in and pay-out for the transactions in this segment are both conducted on a single
day. Auction session for shortages in demat segment is conducted on BOLT on the day after pay-
in/pay-out. The pay-in / pay-out (money part) takes place through computerised posting of debits
and credits in the members’ bank accounts as in the case of physical segment.

With effect from April 6, 2008, deliveries in the demat mode are permitted in the physical segment.
This is so because sellers are allowed to give delivery in demat or electronic form. As of today, this
is applicable to 278 scrips. As such, a break-up session is scheduled every Monday where
members may mark the mode of delivery, i.e., physical or demat. They, however, have an option
to change the mode of delivery till the pay-in day, i.e., Thursday.

SEBI has directed the stock exchanges in January 2008 that all the trades done by institutional
investors, viz., domestic financial institutions, banks, mutual funds, FIIs and overseas corporate
bodies in certain select scrips should be compulsorily settled in dematerialised form. This list has

- 23 -
been expanded by SEBI from time to time and as on December 31, 2008 trades in 114 scrips for
institutional investors are required to be compulsorily settled in dematerialised form. 29 more
scrips have been specified for compulsory demat trading for institutional investors with effect from
April 15, 2009 making the total scrips in demat form for institutional investors to 143.

Further, under directions from SEBI, trades in 12 and 19 scrips are to be compulsorily settled by
all investors in dematerialised form with effect from January 4, 2009 and February 15, 2009
respectively. Further, trades in another 33 scrips and 40 scrips are to be compulsorily settled in
demat form by all investors with effect from April 5 &May 31, 2009 respectively. Thus, as of now,
trades in 104 scrips are to be compulsorily settled by all investors in dematerialised form.

An overview of the factors

We all want to make money in the stock market. We do so by selling stock at a price higher than
what we buy it for. It makes sense, then, that to make money in the stock market, we need to
understand what causes prices to change. By having an appreciation for the things that motivate
stock price change, we can be better at anticipating the direction and velocity of price moves.

What is Price?

To begin, we must first understand what price is. Financial theorists define stock price as the
present value of all future earnings expectations for the company, divided by its number of shares
outstanding. What this means is that the earning capacity of the company is what defines price.
Often, companies can get significant value out of a relatively small investment in assets because
the ability for those assets to make money is significant.
Even companies that lose money today can have a high share price because price is based on the
future earnings of the company. No enterprise is in business to lose money, so the expectation is
that every business will make money some day. So long as there is the potential for future
revenue streams to shareholders, there will be a price that someone is willing to pay for the
shares.
The earnings that a company could make in the future, the growth that the company could realize
and the time to the realization of those goals are all factors which affect the estimate that the
market makes on the earnings potential of the company.

The Market Mechanism

The value of publicly traded shares is liquidity. Publicly traded companies are worth more than
private ones simply because there is greater access to buyers and sellers, and market efficiency
can better determine share price. The stock market provides value to any company that chooses
to list its shares because the company gains liquidity.

The fact that they are buying implies a belief and expectation that the shares will increase in value
in the future. At the same time, the person who is selling the shares is expressing the opposite
belief. By selling, they imply that the stock is overvalued and the expectation that the stock will go

- 24 -
lower in the future. In this way, the stock market is forum for debate on what the value of the
company and its shares is.

What Affects Price?

There are four main factors that cause movements in stock price:
* New information
* Uncertainty
* Psychological Factors
* Fear
* Greed
* Supply and Demand

Information

Information is key, as it gives the market a reason to value a stock at a particular price level. The
market will price a stock based on all information that the public is aware of. As new information
comes into the public realm, the market will adjust prices up or down based on how the market
perceives the information will effect the future earnings capacity of the company.
It is important to understand how information flows from the company to the public. The public is
supposed to learn about significant new information through the issuance of news. The reality is
that the information usually makes it out before the news is released. Rumor plays a big part in the
flow of information, particularly today when technology allows for the rapid and wide dissemination
of information. Those close to a company often have access to privileged information that they act
upon by buying and selling in the market.

Technical analysis is very useful because it provides tools that allow investors to identify the signs
that new information is being priced into a stock before news is released. Stocks that trade
abnormally often do so because of significant new information, both positive and negative. In this
way, technical analysis helps to reveal fundamental changes in the company before the broader
market is aware of it.

Uncertainty

What a company will make in the future is far from certain. For this reason, we should expect
stocks to bounce around a little bit because of the nervousness of the market about the future of
the company. The uncertain future of the company will bring some volatility in share prices even
during a period in which there is no new information.

Companies that have established a performance record will tend to show less volatility as
determined by uncertainty. General Motors, which is a well-established company with many years
of revenues, will show less volatility than an upstart technology company that has not yet had an
opportunity to establish a track record of revenues and earnings. Because of uncertainty, these
stocks will trade differently and will present different kinds of trading opportunities.

- 25 -
Psychological Factors

Humans are behind the trading activity of the stock market. That means human characteristics are
also factors in how share prices move. Understanding human psychology is extremely valuable
when evaluating investment opportunities because human psychology creates and accentuates
many of the opportunities that investors can capitalize on.

For example, greed often causes stocks to go higher than they deserve to go. By deserve, I mean
that they go higher than the present value of future earnings potential can justify. New information
can cause a frenzy in the market that makes investors lose sight of rational valuation and simply
buy the stock for fear of being left behind. This phenomenon is the basis for some great
speculative bubbles that we have see in history.
At the same time, fear motivated by negative information can cause everyone to rush for the exit
door at once and take a stock, or entire markets, dramatically lower very quickly. Much of the
selling pressure that prevails during market crashes is out of fear, not a rational thought process
based on information.

Fear and greed present incorrect valuations in the market that can exist for relatively short periods
of time but long enough for smart investors to capitalize on. Emotion in the market can be viewed
as an amplifier for new information. It can make moves more extreme than they should be.
However, often the power to this amplifier is pulled and the stock moves back to where it should
reside based on the information that is known about the company.

Supply and Demand

While popular stocks like Dell Computer or General Motors trade millions of shares every day, the
majority of stocks that we can choose to invest in do not have such liquidity. As a result, stocks
that trade smaller volumes of shares are subject to fluctuations because of supply and demand. If
a large shareholder wants to sell a large number of shares into a market with weak liquidity, that
shareholder can dramatically move share price. The flip side is also true when a large buy order
comes into a market that lacks sellers.
Supply and demand can take the short-term balance out of the stock market and present
opportunities for investors who have the patience to see that balance restored. Investors who can
anticipate abnormal supply or demand variations can also capitalize.

- 26 -
CHAPTER 3 : OBJECTIVE

- 27 -
 OBJECTIVE

The objective of the project is to

1. To study about the Bombay Stock Exchange.

2. To Analyze the various factors that would help us in understanding the Bombay Stock

Exchange in a better manner and hence ensuring the safety of our investments as well as

maximizing returns on such investments.

3. To study the various factors that affect the movement of stock prices in the Indian Stock

markets.

(A stock price moves up or down depending on supply and demand factors. It is this fragile

balance in supply and demand which would determine the price movements for a stock and in

aggregate terms the price movement for a group of stocks or for the stock market as a whole.)

4. To study the affect of Bombay Stock Exchange on Indian Economy.

(As we know that Indian economy is a second fastest growing economy as per economists and

statisticians the world over. The Bombay Stock Exchange is the indicator of the economic strength

or weakness of the country. So the study helps us toknow how the Indian economy is affected by

the movement in Bombay Stock Exchange.)

- 28 -
CHAPTER 4 : RESERCH METHODOLOGY

- 29 -
 RESERCH METHODOLOGY

Research Design

The research design is the specification of method and producers for acquiring the information
needed. It is the framework which determines the course of action towards the collection and
analysis of required data. This framework is to ensure that the relevant data are collected
accurately in an economic manner.

Data Collection (Secondary)

Data was collected from ONLY secondary sources.

Primary Data

The data which is collected first hand by someone specifically for the purpose of facilitating the
study is known as primary data. So in this project the data has been collected through
questionnaires.

SECONDARY DATA

Secondary data refers to the information gathered by someone other than the researcher
conducting the current study. Such data can be external or internal to the organization and
assessed through the internet or published information. Secondary sources of data provide a lot of
information for researcher and problem solving. Secondary sources of data provide a lot of
information for research and problem solving.

Secondary Sources:

1.Internet, Websites
2.Newspapers
3.Books
4.Magazines

- 30 -
CHAPTER 5: ANALYSIS& FINDINGS OF DATA

- 31 -
Analysis of the various segment’s of the stock exchanges

In this section we seek to analyze the state of the capital market and its various
segments. It is not an easy task, it is also not just a matter of looking at numbers: the
amount raised, the turnover, government activity in the securities market and so on. The
current state of the Indian capital market is full of contradictory signals: comatose primary
market and vibrant secondary market, dying regional exchanges and an advantage debt
market system without brokers, nation wide access to electronic trading and poor
supervision, budding derivatives segment and dying equity culture. What can we make
out of this? Do they add up to progress or confusion?
The capital market activities in India were relatively on a low-key right upto the 80s mainly
because of the alien regime till 1947, which concentrated more on administration and less
on development. We're talking about the time when the authorities thought they knew the
right areas of growth, the right type of financing and that they know all the questions and
all the answers. Stock Exchanges were placed under the exclusive regulation of the then
government through the proclamation in 1950 of the constitution of India.

The decade of 80S witnessed a very impressive growth record in both the New Issues
Market with the amount raised and market capitalization making tremendous strides .
Yet it was the beginning of economic reform that brought the institution into sharp focus.
The early 1990s was the time when the Indian capital market came to occupy its rightful
place as a significant institutional intermediary between the saving class and the
corporate mobilizing capital. A big achievement of the reform era has been the setting up
of NSE in 1996, which together with the BSE has taken online trading across the country.

Among other major developments, SEBI- set up in 1988, acquired its legislative status
and powers in 1992 through the SEBI Act, 1992. Yet this was the result of long winding
deliberations by the GOI. The need for setting up an independent government agency to
regulate and develop the capital market as in many developed countries was recognized
since the seventh five year plan was launched when some major industrial policy chang es
like opening up of the economy to the outside world and greater role to the private sector
like opening up of the economy to the outside world and greater role to the private s ector
were initiated. Since 2008, SEBI has introduced a set of comprehensive guidelines for
various issues involved with the primary and secondary market and made rules and
regulations for various market intermediaries. SEBI's guidelines on insider trading ,
registration of market intermediaries, takeover regulations CRAs and depository etc.

Are a landmark . Investor protection ahs been the motive behind these guidelines and
regulations. Nonetheless , the institution has a long way to go. Its initiatives are still
trapped on the surface and it has to learn a lot, change a lo t and improve a lot.

While the capital market institutions have grown and the markets have grown, scams and
skepticism has also grown during the 1990s. Yet the capital markets today, have taken

- 32 -
the centre stage in Indian business. The stock market indices are seriously considered
to be the barometer of the perception of the economy and public policy initiatives.

The growth and potential of the Indian capital market acquired over time, and especially
through the 1990s, are captured more easily in the following statements than in any
number of statistics about the current or past states of the economy.

 Bombay Stock Exchange (BSE) is Asia' s first stock exchange having been established
in 1875 while the Tokyo Stock Exchange was founded three years later in 1878.

 BSE witnesses second highest intensity of trading in the world next to Taipei (
Taiwan ) and more than that I London , Tokyo or New York

 We have the second largest investor population ( over 40 million ) in the world next
only to USA, which has currently about 51 million investors.

 India is second only to the US in terms of listed domestic companies with 9644 listed
companies as at end- March 2012.

 India has become an important market in the emerging markets of the world nest only
to Malaysia, Mexico, Taiwan ,Korea and Thailand in terms of market capitalization.

 As early as 2010, the International Finance Corporation ranked India 22 nd in terms of

market capitalization and 24 th in terms of total value trade among 40 countries with
developed as well as developing markets.

 Our investor population grows by 35 lac every year, according to a recent estimate.

One has to admit that there is flip too. Despite the growth, achievemen ts of the Indian
capital market are inadequate looking at its size and investing population. Market
capitalization is around 20% of GDP, which is extremely low as compared to other
developed countries. The Economic Times world market survey revealed that India ranks
25 th in terms of market capitalization, second in terms of number of companies, but a poor
85 the in terms of average company size. In terms of average company six, Us which is
at the II position ahs an average size of $ 2,173 mm, but India i s way behind with an
average company six of just $19mm. Recent market report have pointed out that Indian
financial market are second only to Nasdaq in speculation, thereby surpassing most of the
markets such as New York Exchange (NYSE) London Stock Excha nge and markets in
Hong Kong, Singapore and Japan . The total picture reveals that despite the striking
achievements , the size, the rapid and fast growth and all the hype our capital markets
lack the most fundamental prerequisite of dependable markets , maturity.

Having outlined the development until roughly the mid 90s the situation confronting us
and the status of the market, it is now time to begin detailed analysis for the period under
consideration

- 33 -
 THE PRIMARY MARKET

IN A DEEP SLUMBER

Over the last decade, there has been a mammoth decline in the capital raising role of our
securities market. The primary market has been comatose for long now.. It has been
denied its due place, and our focus continues to be on the second market and trading.
We seem to have forgotten the main role of the capital market is to provide capital.

The amount raised by a non-government public companies during 2011-12 is about 60% of the
amount raised a decade back. The severity of the problem can be gauged by a look at some brief
preliminary statistics: During the six year period from 1996-97 to 2001-2002 , only Rs.8171 crore
were raised through public equity issues, a dismal 40% lower than even the single year
mobilization of Rs 13,312 crore in 1994-95! Further in 2011-12 there were only a precisely 6IPOs
probably the worst performance in independent India. This is in striking contrast to the peak in
2008-09 when a huge 8.03 crore were mobilized. Worse still response form investors even for
these paltry issues were missing; in 3 IPOs , promoters had to stage manage the mandatory 90%
subscription while in case, the issue developed on the underwriter . On an aggregate basis retail
investor put in only 1.78 lakh applications ( PNB alone had 1.5 lakh applications ) in the IPOs of
2011-2012. Coming to specifiestheir are several facets of the kowtow of the primary market
which are far from satisfactory.

Aggregate resource mobilization has suffered a serious setback. It is the government and not
industry which is actively tapping the market, also leading to crowding outing the process. Equity
culture seems to be disappearing. IPOs enormously important as an entry vehicle for new firms
and hence instrumental in widening the market are not popular. Overseas Floatation have lost the
earlier buoyance.

All these will be discussed in turn that the process these claims will be supported with evidence
attempts will be made to analyze the causes for the state of things and suggestions for
improvement will be made if possible.

Short Term Vs Long Term

In the short run, stock prices are dictated more by market sentiment or demand-supply
mismatches. But in the long run, stock prices value the earnings of the underlying business.

All voting is a sort of gaming, like checkers or backgammon, with a slight moral tinge to it, a
playing with right and wrong.

- 34 -
 - Henry David Thoreau

We have all cast votes in some election or the other. It could be an election to elect our class
representative in school or an election to elect the MP of our constituency. Many of our votes
made candidates win. Nevertheless, have you ever wished sometimes that if only you had another
chance, maybe you would have voted for another candidate who would have done better. Or do
you sometimes feel let down by the person you cast your vote for?

Now, imagine a situation where you could cast your vote during the entire tenure of a government
on an ongoing basis, say every month… a general election every month! If this were to be true,
how would things change?

Since all of us have certain expectations from the candidates we cast our vote for, the ongoing
elections will give us an opportunity to vote 'out' a candidate who does not meet expectations or
shall we say fulfil the mandate1 and vote 'in' candidates who have a better chance of doing well. In
other words, over a period, we will be able to weigh the candidates collectively, thereby
recognising their true abilities to deliver on their promises to meet our expectations.

As a result of this ongoing collective action, the candidate/ party that comes to power cannot take
the mandate for granted. After all, if they do not fulfil the aspirations of the electorate that voted
them in, they will soon be voted out of power! Hence, the steady state situation is that, at any
given time, representatives who are best suited to meet the expectations of the people at large will
be in power.

The stock market: voting machine or weighing machine?

"In the short run, the market is a voting machine - reflecting a voter-registration test that requires
only money, not intelligence or emotional stability - but in the long run, the market is a weighing
machine."
- Benjamin Graham

But does the market really end up being a 'weighing machine' in the long run? Between November
2009 and February 2010, any software stock you touched turned into gold. Let's take the
instances of Infosys, the established leader, and Silverline Technologies, the desperate wannabe-
Infosys. In November 2009, Silverline appreciated by 63% while Infosys appreciated by just 39%.
The markets in their frenzy were bidding up Silverline expecting it to outshine Infosys. But did it
mean that it actually did?

Nope. The market realised its folly very soon, which is why between 1st December 2009 and 30th
November 2010, Infosys appreciated by 57% and Silverline declined by 46%.

- 35 -
A temporary madness

Take a look at the big picture for these two stocks…

Chart 1 (Infosys)

In order to even out the fluctuations caused by the daily voting pattern of the market, we have
taken the simple average of prices over the 30-day and 100-day period. Notice some correlation
between the average prices and the profit growth of these two companies?

Chart 2 (Silverline Technologies)

The growth in profits has dictated price movements or shall we say the market has recognised the
stocks for their individual merits.

Despite the fact that Silverline is in a high growth sector and has the advantage of being small
sized, the company has compounded profits at 63% p.a. whereas Infosys has compounded profits
at twice the rate (126% p.a.). By now, you know enough of compounding to work out what this
differential can do over even a short period of three years.

Praise the stock market. It has it all figured out in the long run. It does get carried away
sometimes but never fails to recognize its mistake and get back on course.

- 36 -
In a very simplistic manner, we found for ourselves how the moving average prices over a period
track the change in the underlying profits. Every participant casts a vote in the stock market every
time they trade. There are a few people who keep polling everyday while there are the others who
step in whenever they spot a distortion in the long-term trend of the business that provides an
opportunity to make some big profits. Of course these are the two categories of participants
'traders' and 'investors'.

Investors and Traders

If Thomas Alva Edison were a stock market analyst, he would have remarked that short run
stock prices are determined by 99% sentiment and 1% fundamentals. On the other hand, stock
prices in the long run are determined by 1% sentiment and 99% fundamentals.
The two forces in play
Since there are two broad tides that influence stock prices, it is logical that the participants in the
market are broadly split into two categories:

1. Those who try to profit by swimming with the 'sentiment' tide that influences prices in the
short run. They are popularly known as 'traders'.
2. Those who try to benefit from the 'fundamentals' tide that influence prices over the long run.
They are popularly known as 'investors'.

By now we know that prices in the long run track earnings per share. Of course, this is a fairly
obvious conclusion - what else would one pay for? Every shareholder owns a part stake in the
business and is thereby entitled to a proportionate share in the profits of the business.

Traders and investors: spot the differences!

Now imagine this: Given that stock prices track earnings over longer periods, if every participant
turned a buyer for the long haul, how would the market subsist? So what happens to the traders?
In such a scenario, what would distinguish a trader from an investor?

But that's not all - the plot thickens! What adds the interesting twist to investing in stocks is that
earnings from a business are uncertain. They depend on many factors, some of which affect all
businesses like an epidemic while the rest affect individual enterprises at a business level . In this
manner, the interplay of these influential factors creates diversity of opinion, one of the basic
requirements for a fair market place.

Traders and investors alike cast their vote every time they buy or sell a particular stock. The stock
price at every moment in time reflects the resultant of the collective action of the market
participants at that moment in time.

Traders poll in everyday based on their judgement of how information on the 'factors of influence'
will affect stock earnings and hence prices. After all stock prices are based on expectations of
uncertain future earnings. As information flows in, the traders poll in to profit from short time gaps

- 37 -
between reality and expectations. The only factors that keep changing often are the factors that
influence all stock prices.

Traders can only hope to maximise profits by trading as many times in the short run that will keep
fetching them small time profits. Hence, these traders thrive on volatility.
Buying based on mismatches in price and value

On the other hand, investors buy stocks hoping to benefit from the growth in earnings. Hence they
respond to factors that influence the trajectory of growth. Hence, the most basic style of investing
will always be growth investing.

Growth Vs Value Investing

Growth Vs. Value investing is one of those debates that have been around for ages now and you
can be sure that in the year 2050 the inheritors of your portfolio will still be at it, hammer and
tongs. Because, they are two diametrically opposite schools of thought on the way to make money
in the stock market. But why re-invent the wheel? Let us first turn to the Gurus who wrote the book
on what both these schools of investing stand for.

Growth stock investing focuses on well-managed companies whose earnings and dividends are
expected to grow faster than both inflation and the overall economy. The real test for a growth
company is its ability to sustain earnings momentum even during economic slowdowns. Such
companies will provide long-term growth of capital, preserving the investor's purchasing power
against erosion from rising prices.

The basic assumption underlying growth stock investing is that these companies have above
average rate of earnings growth and that over time their stock prices will reflect this growth. The
difference between growth and value investing is best understood by the following question.

Would you rather buy a great company at a good price or a good company at a great price?
Growth investing places great store in buying great companies at a good price. Not necessarily at
a great price.

The metrics of growth investing are very different from that of value investing. They do not place
great emphasis on tools such as P/E, P/B, dividend yield or Replacement value. Growth investors
tend to look more at the future. So they are more concerned with prospective P/E's and PEG
ratios. In other words they are more concerned with the company's P/E based on 2004 earnings
than with 2000 earnings.

"In short a stock is worth only what you can get out of it. “

This is obviously no easy task, because it involves complex calculations and many assumptions.

- 38 -
But this remains the only way to value growth stock. It is because it involves so many assumptions
about the future that growth investing stands apart from value investing.

And because Growth investing is less about a rule-bound approach, it is quite easy to err. Growth
stock investors would do well to remember this warning from Warren Buffett in his 1989
Chairman's speech

"In a finite world, high growth rates must self-destruct. If the base from which the growth is taking
place is tiny, this law may not operate for a time. But when the base balloons, the party ends. A
high growth rate eventually forges its own anchor.

So which is the better way to make money? Growth or Value investing?

As history shows there have been many investors from both schools who have met with great
success. The key to their success has been their discipline and commitment to following what they
understood best.
Investors who play musical chairs between these 2 styles run a greater risk. The risk of following
the wrong strategy at the wrong point!

Of course, it is a difficult to clearly state who is a 'trader' and who is an 'investor'? A better way to
distinguish them is from what tide they hope to profit from! The worst state is to be thinking like
one and acting like the other.

Time is another distinguishing factor.A critical element that creates diversity of opinion and hence
a fairer market is time. One, factors that affect businesses change over a period of time. Two,
since traders and investors have different time horizons, their views on the impact of these factors
of influence varies in degrees.

Consider a sharp fall in Nasdaq in a single day. The impact of a sharp decline has a lot of effect on
the short-term perception of Indian technology stocks. However, in the long run, the earnings of
Infosys, say, is not impacted by a day's decline in the Nasdaq.

Hence a trader is likely to react negatively to the single day decline in NASDAQ where as an
investor would be unfazed. In fact, the 'value' investors will step in if the prices reach attractive
levels, thanks to the terrified traders.

However, a sustained decline in Nasdaq may have the potential to set panic attacks among the
usually serene investors!
Time is also the great leveller

"Time destroys the speculation of men, but it confirms nature."

- Marcus Tullius Cicero (106BC - 3BC)

- 39 -
Traders get to know soon whether they are right or wrong, but investors have to wait for a long
time. Hence, 'humility' is a trader's virtue while 'patience' would be associated with an investor.

Why have equity prices fallen in the past?

 Whenever governments have fallen; political instability (Top-of-the-mind recall)

 Inflation hitting double digits; rupee falling; interest rate hikes (the knowledgeable will tell
you these are broad economic parameters that affect all businesses)
 A lot of people will tell you that wars have spooked the market—Gulf War, Kargil crisis, etc
(country and lives are at stake.).
 Scams!! (Human greed knows no bounds).
 Bad management interested in making a quick buck themselves
 Company’s products bombed (Bad luck, bad strategy or bad marketing?).
 Lakshmi Machine Works suffers as textile mills are not doing well (a case of a specific
sector going bad that wipes out even the best of companies).
 A chemical company’s plant caught fire destroying it completely (God save us!)
 A brilliant product but the company’s borrowings strangled the product before it saw the
light of the day (Debt leads to death!)

We seem to have got two watertight classifications for equity risk. One affects specific companies
and sectors. Textbooks have various names for it—‘diversifiable risk’, ‘unsystemic risk’, ‘business
risk’, ‘company risk’ and so on. The other set of risk affects the entire market—‘undiversifiable
risk’, systemic risk’, ‘market risk’.....
The amazing power of classification! Suddenly, our big list of risks looks manageable. We just
need to understand which basket they belong to! To get the classification right, let us delve a little
deeper into the two groups.

- 40 -
Company risk: a closer look

Though company risk is specific to the company, some risk factors that affect the business are
within the control of the company. Corporate India is replete with instances of how a company
could have controlled its future better.

Real Value’s (the ‘Ceasefire’ company) ill-conceived foray into ‘vacuumisers’ is an example of
strategy going haywire. There are hazar Indian promoters who have siphoned money from their
listed companies—examples of bad management. Core Healthcare (earlier Core Parenterals) is
another classic example of a company that had the right product but, in its urge to build mega
plants, it borrowed beyond its means before creating a market—the rest is history (the company
got into a debt trap, and the product became a commodity).

All these risks can be avoided if proper homework is done to understand businesses and make a
future looking call on their businesses. Only stock-picking skills can see you through this maze of
risks. Now you know why good research analysts are so sought after!

The other sets of risks that are business specific are beyond the control of the company. What can
Madras Cements do if the cement market suddenly slumps as there is too much new capacity with
no matching demand! What can TNPL do if demand for newsprint falls as more and more people
take to reading newspapers on the Internet! (Not now! But it can happen 10 years down the line)
What can Tisco do if Posco dumps a million tons of steel in the country (not literally!)!

Of course there is something that these companies can do to rework their strategies, but it is time
consuming. And you know our stock markets! The prices will get hammered with the first waft of
bad news. In any case, if one were to diversify one’s holdings across various sectors and
companies, the risks can get minimised to a certain extent.

- 41 -
Market risk

Company risk is still easy to contend with, but what do we do about market risks? Out of the
number of factors affecting markets, our experience tells us that market declines under many of
these factors are temporary and provide excellent buying opportunities for the patient investor who
thinks and buys good companies (We love this kind of an investor or company)
Market risk is a different animal altogether. Diversification does not help as all stocks get affected
by these factors. But fret not, the native ingenuity of mankind has found solutions to this problem
too, in the form of ‘Futures’ & ‘Options’

Fiscal policy and the stock market

No escaping the fiscal deficit :-

There's no escaping the fiscal deficit. The thing has escaped from the pink papers, where it
rightfully belongs, to the ordinary newspapers. The investor has enough on his mind tracking his
portfolio, so why does he need to bother about the fiscal deficit?

Think of the government as the biggest player in the financial markets. That's the reason why we
lesser mortals have to bother about it. It's a bit like the Unit Trust of India. When the UTI got into
trouble last year, the markets took a tumble, and then waited with bated breath for UTI to get
bailed out. And the government is many many times bigger than the UTI.

Sure, the government doesn't play the stockmarkets itself, except through its disinvestment
programmes, but it controls the debt markets. The government's need for borrowing money to
finance its expenses is nothing but another name for the fiscal deficit. No wonder it affects the
entire economy.

Government borrowing affects the entire economy. Borrowing from RBI is a surefire recipe for
inflation. Sometimes, the government does not borrow directly from the market but instead
borrows from the Reserve Bank. That's actually equivalent to printing money, and is called, in the
jargon, monetising the deficit. When this happens, the amount of money supply increases and that
makes price rise as well. Don't get it? Well if we all had a printing press at home in which we could
print money then we could all become crorepatis.. But that is a surefire recipe for inflation.

When the government borrows from the RBI very much the same happens. Sure not all of us have
a printing press. But this is one hell of a big printing press. So prices are bound to rise. And then
the price that you pay for money (which is nothing but interest rates) begins to rise too up.

Monetary policy and the stock market

Monetary policy affects all of us .

- 42 -
You would have noticed the reams of newsprint churned out when the Reserve Bank of India
announces its monetary policy every six months. Like a lot of people, you would have thought that
 it is merely another reason to fill the financial pages; or,
 more charitably, it may be important for banks but not for ordinary investors like you and
me.
The fact is that RBI monetary policy has an effect on all investors. Let's take a look how.
A tool to control inflation, which directly affects interest rates
Monetary policy is aimed at controlling the level of inflation & interest rates in the economy. To do
that, the Reserve Bank tries to lower the money supply when prices are rising. How does it do
that? By lowering the amount of money available with banks. Raising reserve requirements, i.e.,
the amount of money which banks must keep impounded with the RBI, is one way. Another
method is to sell bonds to the banks. When banks buy bonds from the RBI, money flows out from
banks to the RBI, lowering the amount of money available for lending. You'll remember that just
before the 1996 election finance minister Manmohan Singh tried his best to lower inflation,
believing that a lower inflation rate would improve the chances of a Congress government. He got
that wrong, but in the process RBI squeezed money supply.

So by changing the money supply, the Reserve Bank can determine the level of interest rates.
Higher levels of interest rates impact corporate bottomlines and discourage companies from
investing. That slows down growth.

In other words, can the RBI spark an economic recovery by increasing money supply, with
resultant lower interest rates? The evidence does not seem as strong. Lower interest rates can
help in creating the right atmosphere for a recovery, but it is not enough to spark one by itself.
Some kind of stimulus to demand must go hand in hand as well.

Impact on stock market

In the West, where both the bond as well as the equity markets are mature, an increase in interest
rates leads to more money flowing into bonds. Other things remaining the same that means less
money for the equity markets. You'll remember that late last year, when the Dow showed signs of
weakness, Federal Reserve Chairman Alan Greenspan decided to lower the Federal funds rate
and the discount rate. Lowering the rate at which banks could access Federal funds was a signal
for interest rates to go down in the rest of the economy. Money flowed from the bond into the
equity markets, the Dow crossed the magic 10,000 mark, and Greenspan single-handedly saved
the world! In India, the bond markets are not very liquid, and only the banks are active in that
market. Since banks do not invest in equities, except marginally, there is no flow of funds from the
bond to the equity markets. So the impact of monetary policy on the equity markets here is
indirect, rather than through the direct route.

There's yet another way in which higher interest rates affect the advanced economies. Because
almost everyone in the US has borrowed up to his neck, interest rates are important for consumer
spending. When interest rates rise, people spend less because they can't afford to borrow at the
high rates. This lowers demand and slows the economy down.

- 43 -
However, the RBI does have a more direct way of influencing the stockmarket. That is by varying
the percentage of funds which banks are allowed to invest in the stockmarket. At present, the limit
is 5 per cent of the incremental deposits of banks. That means, if a bank gets Rs100 worth of new
deposits, it can invest Rs5 in the stockmarket. Unfortunately, with banks not being very keen on
investing in equity, their investments been far below the limit.
RBI can also influence exchange rates

The central bank also has the power to decide the level of the currency both by direct intervention
and by targeting interest rates, which are a key factor in determining exchange rates. If it feels the
rupee is too weak, it sells dollars in the market and buys rupees. If it feels the rupee should go
down a bit, all it has to do is buy dollars. The rupee's exchange rate obviously has enormous
implications for importers and exporters. What's more, even those companies which produce for
the domestic market would be affected, because the price of imports would be changed. For
instance, Reliance Industries would benefit if the rupee becomes stronger, as the price of
competing imports would rise. Similarly, companies which export software would benefit when the
rupee weakens.

- 44 -
 The MSCI Index
Who is MSCI?

Morgan Stanley Capital International Inc. (MSCI) is a leading provider of global indices,
benchmark related products and services to investors worldwide. MSCI indices are the most
widely used benchmarks by global portfolio managers.

According to a recent survey by Merrill Lynch/Gallup, over 90% of the North American and Asian
international equity assets are benchmarked to the MSCI Indices. In Europe too, over 50% of the
continental fund managers peg their portfolios to the MSCI Indices.

Besides this, the MSCI has 1200 customers worldwide who use its indices as a benchmark.
Hence any change in these indices has a significant impact on global capital markets.
What does it mean to be a benchmark?
How does the global fund manger decide where to invest his money and in what proportion (asset
allocation as they call it)? He needs a benchmark that indicates the available investment
opportunities around the globe.

The benchmark is typically an Index. The most popular global indices are the MSCI indices. The
MSCI Indices (there are a basket of them) consist of various stocks from individual countries. The
global fund managers can then benchmark their performance in two ways.

Either they can mimic the entire portfolio of stocks and hence peg the return to that of the index or
they can choose some other stocks that can outperform the return of this index. Hence the
portfolio manager's investment patterns are determined not just by how attractive the companies in
your country are but also by the weight of your country in the MSCI index.
How is the index generated?
The MSCI equity indices are constructed in a consistent manner across all countries,
encompassing a total of 23 developed markets and 28 emerging markets. This consistent
approach to index construction ensures proper representation of the country's underlying industry
distribution and market capitalization. It allows investors to accurately compare equity performance
across markets, regions and sectors.

In this process, MSCI tracks developments in almost 3000 companies (both listed and unlisted)
around the globe. These equities account for over 99% of the world's total market capitalization.

MSCI country equity indices are constructed using the following five steps:
 Define the listed securities within each country.
 Sort the securities into industry groups and select securities until 60% of each industry's
market cap.
 Select the securities with good liquidity and free float.
 Avoid cross-ownership among stocks in the index.
 Apply the full market capitalization weight to each stock.

- 45 -
This method not only ensures the inclusion of every industry into the country's index, but also that
they represent 60% of the market capitalization. In other words, one can determine the
performance of a particular country's market by calculating the returns of the country's MSCI
index.

These 51 MSCI Country Indices are used to generate regional indices such as MSCI Europe
Index, MSCI Emerging Market Index. Those global managers who want to expose their fund with a
certain regional risk can use these regional indices.

The MSCI world index is constructed by combining the MSCI country indices under certain
weightages. This world index is revised on a quarterly basis and therefore the country's weightage
keeps shifting on the basis of expected performance of different MSCI Country Indices.
Powerful enough to affect country's capital market
It is very difficult for any global fund manager to track the whole world's equity market and optimize
the profit of his portfolio. MSCI Indices cover almost 99% of the entire world's market
capitalization; therefore almost 90% of the global managers from North America and Asia follow
these indices for their investment decisions.

Here's the clincher. If MSCI revises weightage of any country in the MSCI world index then most of
the global managers react to it and shift their investments correspondingly.

For example, if MSCI announces any dip in the India's weightage in the world index and increases
say Thailand's weightage, then global managers will decrease their exposure to Indian stocks and
the money will shift to Thai stocks.

Hence, these revisions of country's weight in the index can cause huge sums of capital to either
flow in or out of a country changing the fortunes of its capital market.

Stock Auctions

Auctions and their origin

The word auction, in simple terms, implies a public sale in which property or items of merchandise
are sold to the highest bidder.

Did you know that auctions used to take place way back during the Homeric period in Greece? It
was a means of transferring the ownership of slaves from one person to the other. This same
underlying concept of auction has taken a more refined form in recent times - like the auction of
commodities or the belongings of famous personalities. Have you ever been to an auction house
like Christie's or Sotheby's, where works of art are sold to the highest bidder in auction?

- 46 -
Auctions are conducted on the exchanges when, for some reason, shares (physical or demat) are
not delivered to the exchange on time.

Exchanges conduct auctions to penalise the party for defaulting on delivering the shares on time,
and thereby to protect the sanctity of settlements. It is a necessary evil - imagine the chaos if the
defaulting party went scot-free and delivered shares at its own free will. This would trigger a chain
reaction of defaults.

If the defaulting party fails to deliver the shares on time to the exchange, the exchange in turn is
unable to deliver the shares to the party who purchased them. The purchasing party in turn might
have already sold those shares before receiving them from the exchange and now it would be
unable to deliver those shares on time. This vicious chain could go on and on.

Therefore, it becomes imperative that auctions are held so that pay-in and pay-out of shares take
place on time, in accordance with the settlement cycle of the respective exchanges.
Reasons for shares to go on auction
Shares come under the hammer when they have been either delivered short or found to be
objectionable by the exchange. Based on the reasons why shares qualify for auction, they have
been categorized into two types:

1. Auction due to shortages

2. Auction due to objection

Auction due to shortages

As has been discussed above, an auction due to shortages takes place when the delivering party
fails to deliver its share on time to the exchange, thereby triggering the vicious chain reaction of
the exchange being unable to deliver the shares on time to the purchasing party and purchasing
party in turn being unable to deliver shares on time if it has already sold it and so on... One of the
common reasons why shares come under auction due to shortages is the confusion that arises
about the delivery date of the shares, if they are going into the 'no delivery' period.

Auction due to objection

Physical shares go in for auctions not only if they are delivered short, but also if they are found to
be objectionable and not rectified on time by the party concerned. There are many reasons why
shares could come under objection. To list a few:

 Transfer deed attached to the share certificate is out of date

 Details like distinctive number, folio number, certificate number, transferor names etc are
not filled or filled incorrectly on the transfer form attached with the share certificate
 Witness stamp or signature on transfer deed is missing

- 47 -
  Signature of the transferor is missing
 Delivering broker's stamp is missing on the reverse of the transfer deed
 Stamp of the registrar of the company is missing

When a share is returned to the broker by the exchange as objection, the broker is liable to inform
the client and get the objection rectified. If the party fails to rectify the objection within a stipulated
time period, then the shares go for auction. The defaulting party is then penalised by having to
bear the auction price.
Does one always suffer a big loss in an auction?

The defaulting party does suffer a loss when their shares go in for auction. Imagine the rate at
which the auction would take place if the market is rising and there is a great demand for the
stock. The defaulting party would be required to pay for the difference between the higher auction
price and the actual sale price of the stock.

Even in the case of a falling market when stocks are taking a beating, the defaulting party does not
stand to gain the difference in the auction price and the actual sale price. The defaulting party
instead has to forgo the entire sale proceeds it had earned.

Or even worse is the case when there are no participants in an auction. In such a case, the
auction price is decided by the exchange. It varies with exchanges and is called the 'close-out'
price.

Management Perception

Revered investment analysts the world over have constantly drilled into our minds that it pays to
be invested in companies whose managements are perceived to be focused and proactive. A
good management always commands premium valuations for the stock. The logic is justified given
the fact that the management’s attitude towards the company determines the growth curve it
takes. Let’s test this reasoning and see whether the logic really holds good for Indian companies.
For the study lets take some companies known for their reputed managements. The sample
includes the likes of Infosys, HDFC, HDFC Bank, HLL, Hero Honda, Punjab Tractors and Dr.
Reddy's.

HLL Vs contemporaries

FMCG major, Hindustan Lever (HLL) is a prime example of what management perception can do
to the valuations of the stock. HLL has always commanded premium valuations not only because
of its size, but its consistent good performance. Though another FMCG company, Nirma, too has
put in good performance year after year, it still lags behind when it comes to valuations.
Though Nirma’s management is considered to be very focused on its business, it is HLL’s
management that is considered to be more pro-active between the two. HLL’s management has
continually expanded its topline by adding more products and businesses, either organically or
inorganically. It spreads the company’s risk.

- 48 -
 Mkt. Cap. (Rs m) ROE (%) P/e (X)
HLL 445,727 50.9 41.7
Nirma 21,687 27.3 9.3
Godrej Soaps 4,260 20.2 7.0

If you look at the valuation table, it looks as if Godrej Soaps is back with a bang. But this revival in
fortunes of Godrej Soaps can also be attributed to a large extent on the right moves the
company’s management has been making in the last one year. The management has broken the
company into two, to lend more focus to its FMCG business. The company has been repaying its
debts in a bid to improve its profitability. All this has not gone unnoticed by the bourses. The
valuations of the company have started to improve in the past couple of months, as the markets
perceive the management to be on the right track.

HDFC Vs contemporaries

India’s leading housing finance company, Housing Development Finance Corporation Limited
(HDFC) is another fine example. HDFC is a pioneer in housing finance in India. The company
controls 70% of this market. Its consistent performance, both financial as well as in customer
satisfaction has helped it retain its market share in this business. Despite new entrants in the
business in the recent years, it continues to be the leader.
Because of its carefully laid out huge branch network it is able to service its consumers efficiently.
HDFC’s management is rated very highly for its focused approach to its business. In contrast
aggressive entrants like ICICI have historically taken on more NPAs.

Mkt. Cap. (Rs m) ROE (%) P/e (X)

HDFC 66,702 19.2 16.6
LICHF 2,586 19.3 2.4
ICICI 76,332 15.7 6.3

While the competition plays catch up with HDFC, the company has branched out into banking,
insurance, mutual funds and retail loans. Its subsidiary, HDFC Bank, is already the fastest growing
private bank in India. Even this subsidiary, is valued highly because of the management ‘feel good’
factor.

Mkt. Cap. (Rs m) ROE (%) P/e (X)

HDFC Bank 61,331 16 51.1
ICICI Bank 33,656 9.2 31.8
SBI 124,733 16.9 6.1
UTI Bank 5,447 21.3 10.7

- 49 -
Infosys Vs contemporaries

Let’s take a look at one company, which has now become synonymous with the Indian software
revolution, Infosys. The company not only has been turning in good performances quarter on
quarter, but is also at the forefront of management reporting. Infact, Infosys’ annual report was one
of the first in its kind in India that gave complete disclosure on the company’s operations to its
investors.
This small act must have added tons of goodwill to its valuations. Since then, disclosures by
companies in their annual reports and measures to improve relations with investors have touched
new levels in Corporate India. This proactivity and foresight has helped Infosys become one of the
most valuable companies in the country, adding to shareholder wealth year after year.

Mkt. Cap. (Rs m) ROE (%) P/e (X)

Infosys 428,255 34.3 149.8
Satyam 107,682 38.5 79.8
Visualsoft 15,720 31.9 55.9
Silverline 15,738 15.3 22.3

Hero Honda Vs contemporaries

In the two-wheeler segment, it is not for nothing that the Munjal family is revered. The family’s
motorcycle joint venture with Honda Inc, Japan, Hero Honda, redefined the shape of the two-
wheeler industry in India. At a time when Bajaj Auto was the uncrowned king of this segment (read
scooters), the Munjals had foresight to gauge a shift in consumer preferences towards
motorcycles. For this, they were amply rewarded. Not only the company, Hero Honda, became the
undisputed king of the two-wheeler segment but in the process created a lot of wealth for its
investors. Till today, the company’s distribution muscle coupled with its top of the line bikes,
command the consumers as well the investors’ loyalty.

Mkt. Cap. (Rs m) ROE (%) P/e (X)

Hero Honda 33,749 43.3 17.6
Bajaj Auto 22,386 19.1 3.7
TVS Suzuki 4,331 27.4 5.0

- 50 -
Punjab Tractors Vs contemporaries

The management of Punjab Tractors, part of the Swaraj Group, is not as high profile as some of
the leading business houses in India. But the company’s silence is more than made up by the
consistent performance of the company. The company is focused on the tractor segment, unlike
market leader Mahindra & Mahindra. It is this focus that has paid it rich dividends in terms of
shareholder value. Whenever, the agriculture sector in India is on an upturn, Punjab Tractors is
the first one to reap the dividends. On the other hand, whenever a bad crop comes by, Punjab
Tractors focus helps it tide through the difficult situations smoothly as compared to its rivals. The
company’s prudent financing policies and working capital management has kept it at the forefront
of providing the maximum return to investors.

Mkt. Cap. (Rs m) ROE (%) P/e (X)

Punjab Tractors 12,663 35.8 9.5
M&M 18,782 14.7 6.8
Escorts 8,841 11.9 7.9

Dr. Reddy’s Vs contemporaries

In the last few years, the domestic Indian companies have seen a big re-rating in their valuations.
This has come in the wake of the advances made in the field of Research and Development
(R&D). The company that spearheaded the Indian R&D effort was Hyderabad-based Dr. Reddy’s
Laboratories. The company’s pioneering efforts to discover new molecules, ahead of the much
dreaded product patent regime post 2005, tilted the balance in favour of homegrown
pharmaceutical companies. This encouraged many other domestic companies to have faith in their
R&D effort and increased investments in this area. It’s no wonder then that Dr. Reddy’s sits at the
top of heap in terms of valuations, even ahead of the MNC pharmaceutical companies in India.
Mkt. Cap. (Rs m) ROE (%) P/e (X)
Dr. Reddy's 34,516 15.8 57.2
Ranbaxy 79,223 13.8 40.7
Sun Pharma 9,311 28.7 10.3
Cipla 70,165 23.1 52.7

But it must be added here, that a good perception of the management is borne by years of solid
performance and doesn’t build overnight. No short cuts to this

- 51 -
AGGREGATE RESOURCE MOBILISATION IS GOING DOWNSHILL

A look at the statistics for resource mobilization by the corporate sector both from
domestic and overseas markets will reveal that the situation is extremely disappointing

TABLE 1: TOTAL RESOURCE MOBILISATION BY THE CORPORATE SECTOR FROM

THE PRIMARY MARKET

YEAR AMOUNT RAISED PERCENTAGE

VARIATION

2007-2008 42125

2008-2009 60192 42.89

2009-2010 72450 20.36

2010-2011 174403 2.7

2011-2012 78396 5.37

2012-2013 40873.53 -47.86

Source: Securities in India a review, NSE. www.nseindia.com Monthly Review of the

Indian economy, CMIE Amount are in Rs Crore

Not only is resource mobilization increasing at a decreasing ra te over the entire period,
by for the Year 2012-2013 the amount raised from the primary market has declined in
absolute terms.. A suggestive summary of the above data reveals:

Starting from a striking and impressive acceleration of 42.89% in 2008-09, the growth rate
of primary market mobilization down to a pitiable -47.86% in 2012-2013t through a steady
decline.

Corporate issues figures tool a sharp downward spin total amount raised started a t Rs
42,125 crore in 2007-08 and ended at Rs 40,873.53 crore in 2012-2013 less that the
former , Inspite of reaching a peak of Rs 78,,396 crore in 2010-11.

What is perhaps most striking is the decline in the corporate issues in 2012-2013 by
almost 50% the amount raised fell by nothing less than Rs 37,522.37.

TABLE 2: RESOURCE RAISED BY THE CORPORATE SECTOR VIS -À-VIS R

SOURCES RAISED BY THE GOVERNEMT FROM THE PRIMARY MARKET

- 52 -
YEAR TOTAL CORPORATE SECTOR GOVT SECTOR
AMOUNT
RAISED

AMOUNT PERCENTAG AMOUNT PERCENTAG

RAISED E RAISED E VARIATION
VARIATION

2007- 109511 42125 67386

2008

2008- 106067 60192 42.89 106067 57.4

2009

2009- 113336 72450 20.36 113336 6.85

2010

2010- 206879 74403 2.7 128483 13.36

2011

2011- 226911 5.37 152508 18.7

2012

Source: Securities Market in India, a Review, www.nseindia.com

(Amounts are in Rs Crore)

The important facts revalue by that data are:

 Not only does the government raise higher amount of resources very year vis -a-vis
the corporate sector, but the rate of growth is also higher for the former as compared
to the latter

 The second graph shows that the share of the government is higher than that of the
corporate sector on a sustained basis.

 Data suggest the presence of crowding out effect wherein excessive borrowin g by the
government leaves little room for the corporate in the m arket. Except 2008-2009,
years of high growth of corporate borrowings ( 20.36%) correspond to lower growth
rates for the government ( 6.85%) : 1999-2000 and vice versa : in 2010-11 and 201-12
growth rates for corporate sector and government are 2.7 % and 5.37% and 13.36%
and 18.7% respectively.

- 53 -
 FINDINGS OF THE PROJECT

Response to public Issues

The salient aspects which need to emphasized are:

 The response to public issues is worsening over time as the proportion of issues
eliciting adequate response (<1.5 times) has been steadily declining with only slight
recovery in 2011-2012.

 The percentage of issues subscribed to more that 10 times is extre mely low for the
entire period for 2009-2012, hovering at or below 6 in the remaining years.

 2009-2010 has been slightly better with a significantly 53% of the issues subscribed to
more that 10 time as how by the peek at this year. This is due to increase in mega
issues during this year-there were 19 mega issues( Rs.100crore and above) as
against 11 such issues in the preceding year.

 Another way to substantiate the contention that public issues are losing ground , with
the exception of 2009-2010, is by noting that the most subscribed issue during 2008-09
was by KPIT systems which was over subscribed by 42 times; the up trend in 2009-
2010 is evident in the fact that Sankha Infotech Ltd., most subscribed during the
period, was over subscribed only 58 times; facts for 20011-12 are extremely
disappointing with Punjab National bank being oversubscribed by a mere 4.29 times
highlighting the fact that absolutely no issue was subscribed more than 10 times in
this years.

Recent surveys throw light on several aspects of the market that the investors are
dissatisfied with and also reveal the psychological attitude of the investor towards the
market. Important excerpts from these surveys follow:

 A survey conducted by Dr. L.C Gupta of Society for Capital Market Research and
Development ( SCMRD) shows tat the number of investors is stagnating at 2 crore
since 2007 . This is slightly lower than the investors in MFs, which stand at 23 million.

 These investors account for barely 7% of all Indian households since 2010.

 There are studies based on the active accounts with the National Share Depository
Ltd. which suggest that 2 crore might be an overestimation for investor population
.they put the figure at 50 lakh or so, and given that any person with a por tfolio of at
lest 5 share has to open an account to sell these shares, this estimate is probably
correct.

 The biggest growth in investor population happened between 2010 & 2011 but
repeated scams have brought this growth to a grinding halt. A survey by N SE shows

- 54 -
 that confidence in the market mechanism has received blow after blow over the last
few years due to repeated market scandals.

 The SCMRD study points out that investors perceive the primary market as far riskier
than the secondary market . The SEBI-NCAE survey conducted in 2000reinforeces
this.

 The Shankaracharya committee appointed by the finance minister in 1998 concluded"

most corporates enjoy little credibility with investors"

 According to the SEBI- NCAER survey , safety and liquidity are the primary
considerations that determine the choice of an asset: bank fixed deposits are
considered to be the safest while capital market instruments as the most risky

 Low per capital income, apprehension of loss of capital, a and economic insecurity,
which are all inter-related factors, significantly influenced the investment attitude of the
households.

 The lack of awareness about securities market and absence of a dependable

infrastructure and distribution network coupled with aversion to risk inhibited no n-
investor household from entering the securities markets

 As per the SCMRD survey concluded in 2011, IPOs have gone down into investor's
preference with only 29% of the respondents regarding them as "as a reasonably good
long term investment" due to recent developments and the position of the secondary
market has improved due to reforms , as the corresponding percentage is 39%.

 The same survey concludes that people intending to invest in " new share issues" was
much lower than those intending to buy shares from the secondary markets , the
respective percentages being 16% and 41%

 The SEBI- NCAER study shows that a stunning 90% of the equity investor population
owns 5 stocks or less. Over 75% owns shares in just three companies and just under
a quarter of all investors have brought shares in only one company.

 Surprisingly, nearly 79% of the primary market investors hold on to their investments
for over three years.

The situation is indeed extremely grim. The last observation shows that India had s erious
investors who were defeated by repeated scams and supervisory failures. Several
initiatives to turn around the situation can be derived from the above discussion itself.

We have to understand that making statements like" Capital markets can't dev elop unless
investors develop a healthy and more confident attitude towards risk taking " doesn't take
us anywhere. The economics behind this statement is expected to hold in normally
functioning and healthy market , not in markets , which are, torment ed by repeated

- 55 -
scams and supervisory failures, and I such circumstances , investors will stay away. And
it is not fair to put the blame on them. In fact, radical steps need to be taken to solve the
problem of scams, frauds and manipulations. This is of unprecedented importance as this
is the cause that is fundamentally important for the present state of affairs. Other causes
are subsidiary.

Consequently. Scams need to be noticed and dealt with before the damage: in the
past, we have been mute spectators to the making and development of scams and only
when these had fully blown,ultra-restrictive guidelines were introduced which in effect
almost strangulated. A good example of this is how after the vanishing companies scam,
new entries barriers allowed only 3- year dividend paying companies to float issues, not
realizing that closely held companies in the double taxation era were not dividend payers.
Regulation has to be on going and a day to day affair and not a wake up call whenever
the is a crisis. There is an urgent need as such to install a proactive 'market -watch'
system so that emerging mal practices are detected and nipped in the bud itself.

DISCLOSURE - QUALITY OR QUANTITY?

A historical perspective reveals that many problems faced by the pr imary market can be
traced back to the directive of 2006 which overnight abolished the office of CCI ANC
Freed the markets . As opposed to the earlier method of CCI deciding upon the pricing of
issues, the new era was based on free pricing . When the new policies were liberalized in
2006, the key pillar -information disclosures were put in place only gradually and in steps.
Gradually, only the quantity of information increased buy not lists quantity. Consider, risk
factors, a key disclosure element in offer documents. These are either not well defined or
are suppressed in the prospectus. The focus remains on quantity, with risk factors only
filling up pages and many a times, the critical ones are either not listed at all or these get
lost in a maze. There also appears to be a lot of high -handedness in addressing the risk
factors. Consequently, untill 2006-07, almost everyone who invested in primary issues
obtained returns. Subsequently, almost everyone who has invested in primary issues has
lost money. No wonder, then, that the market is a mess.

When talking of reforms, changes and recommendation, we have to realize that quality
information is the lifeblood of vibrant transparent markets. Through significant progress
has been made in the last few years, a lot more need to be done. There are several
recommendation in this regard:

 An extensive review of issue stage disclosure is recommended sooth these are

brought in line with best international practices. A credible mechanism for asses sment
of risks and their disclosure in a complete, relevant and investor friendly manner is
also critical to encourage inforend decision making by investors . Also, information
should be made available uniformly to all classes of investors and at the sam e time.

 Attempts should be made to rationalize the role of exchanges: disclosure is presently

dispersed over 24 stocks exchanges. While information is filled by a company only with

- 56 -
 the stock exchange where it is listed, its investors are spread allover the country.
Moreover, it is commonly agreed that stock exchanges have not performed their role
adequately compliance by listed companies has been poor with many companies of
filing even their annual reports regularly. These things need to be eradicated .

 We need to ensure easy availability of information to investors. Several; critical

information pieces or tools are simply not made available by the exchanges. The small
investor, of course, has to run from pillar to post for his information needs. The desired
information is also not available to researchers, analyst and media. For example, to
get the balance sheet of and listed company today is a Herculean task, even of a large
company. For effective and fair dissemination of information, SEBI itself, or on a
contract basis host at tone place on the web all balance sheets, quarterly half yearly
results and all other material information relating to each company.

 MAKE THE WEAK REGUALTOR A STRONG ONE

Many will argue that the regulator has failed the investors. despite the fact that it kept
demanding more powers, the reality is that it did not use even its existing power fully and
regularly. Over the years, there have been hardly any convictions and punishments that
act as deterrents have been lacing. But fairly enough, the regulator too has been failed. It
has had to operate with several handicaps including lack of adequate punitive powers
and the lack of independence that a regulator should enjoy. Also, several of its
initiatives couldn't materializes due to objections on the ground of preserving corporate
freedom. The fact is that more freedom actually requires more regulation. A look at the
huge regulations enacted by the SEC in free America is more than an ample proof. There
are several steps that a can be taken to improve scenario:

In the past , most of the regulations had been drafted in an arbitrary manner and sooner
of later, loopholes were sixcovered and exploited by the market. He nce, it would really
make a difference if in the future, once the need for a regulation is felt, a draft should be
first evolved through a committee route which should then put up for public discussion
through a press release or a Website. Apart from adequately describing the rationale
of the regulation , an impact analysis should be done and put out in the public domain.
Moreover, it is necessary to review regulations regularly.

A major overhauling of SEBI is called for. At the end of the day, it is important that SEBI
is feared and respected as a regulator ought to be. The starting point ahs to be suitable
empowerment of SEBI with laws for search and seizure and for slapping higher monetary
penalties for disagreements of unlawful earnings and for compensation to investors.
Equally important is the need to improve SEBI's skill sets. What SEBI needs are
experienced teams of lawyers, accounts, market practitioners, analysts and MF specialist.
For this, the SEC model may be adopted.

 HIGH ENTRY BARRIERS NEED TO BE REMOVED

- 57 -
The entry barriers need to be revised and policies have become more rational. The main
requirement should be of liquidity. In this respect, there are many acceptable eligibility
criteria an done or a combination of more than one of them could adopted: these are net
tangible asserts, market capitalization , to assets, total revenues, retain income, operation
history and so on. It needs to be mentioned that an attempt ahs already been made by the
Primary Market Advisory Committee in this regard; it ahs recommended replacing the
profitability criterion by a benchmark for a net tangible assets in case of IPOs. Another
important recommendation is the one to scrap the requirement of 20% promoter's
contribution is case of debt issues. Another requirement that needs to be revised is the
minimum market capitalization requirement. IT companies, in 2009, were allowed to
reduce minimum public offer from 25% to 10% of the issued capital provided their
minimum market capitalization was Rs. 500 crore. This was subsequently extended to
cover all the sectors but the minimum market capitalization was increased to Rs 1,000
Crore. This new level is too high and is a severe hindrance to attracting more offerings by
good companies. Even the earlier limit of Rs.500 crore was on the higher side and had
enabled only three companies in the entire three years to tap the market, despite the
boom in 2009-2010.

MINIMUM PUBLIC OFFER NORMS

Over the years there has been a rapid dilution in he minimum public offer requirements.
The proportion that has to be offered to the retail investor has been brought down from
60% to 25 % and in some cases to 10%. There is now a move that in case of
simultaneously domestic and overseas offering, their requirement ma y be further diluted
to only that part of t 10% which is not allotted of foreign investors on the grounds that
the only domestic market does not have the requisite depth. This is clearly against the
growth of the domestic market. Therefore, it is suggested that the minimum public offer
should be increased to 25% to impart the desirable public character to listed companies
and also to offer a bigger pie of the market tot the smaller investor.

THE VANISHING ACT

The last few years have witnessed a robbing vanishing act by large number of companies
which has had a negative impact not only due to the lost funds which could not utilized for
productive investment but also due tot erosion of investor confidence and the malaise of
NPAs that has followed.

In early 2011, a high level committee was set up as a joint effort by SEBI and Department
of Company Affairs( DCA) to do something about it. The company adopted the following
definition of a 'vanishing company': a company which had not filed its annu al returns or
any returns for then last two years with the ROCs inspite of issue of a default notice within
fifteens days, or no office of the company is located at the mentioned registered office
address at a the time of inspection by stock exchange was treated as a vanishing
company. Since then, 229 such companies have been identified and order have been

- 58 -
issued to 86 companies and 302 directories prohibiting them for associating with capital
market activities.

Yet, this narrow technical definition ignored the day problem": That the case of vanishing
companies was in fact one of vanishing funds caused by the companies guilty of
aggressive overpricing and misuse of issue fund. A research done by P RIME REVEALED
that of the 100 largest equity issues of the period 2008-12, 72 % had been lost. Further,
interms of action, only minor punitive measure were initiated like prohibiting companies or
is directors form tapping the market for 5 year.

A related issue is the need for a framework for monitoring the end -use of funds.
Companies should be required to submit detailed disclosures about use of issue funds in
their quarterly and annual reports.

- 59 -
 IRRATIONAL EXUBERANCE
A STUDY OF VOLATILITY IN OUR STOCK MARKETS

Until now, I have been providing sound explanations for any new concepts and analytical
terms that I have been bringing in, for the sake of clarity and completeness. But this time
I'm at a loss, for volatility is not one of those jargon terms which people can first mention
in their studies, and then impress their readers by giving thoroughly technical and
impressive definitions. Well then, I have to fall back on the time -trusted and reliable thing
called the dictionary- volatility implies the propensity to change suddenly and
unexpectedly, often in a violent way. But let's just stick to clarity and completeness for a
little while longer and be a bit more descriptive if not technical: random, impulsive,
unpredictable, erratic, unstable, fickle, capricious, u nreliable, wavering are thoughts that
are coming to my mind. But still, to be technically thorough, we need to mention that here
we are looking at volatility of prices of various securities that are traded in the stock
markets.

After such a clear and complete review, it is not difficult to see why it is important that
markets are not highly volatile, for if they are, they are a big hindrance to liquidity which is
so important for the small investor. In highly volatile markets, investors are not assured o f
the fact that they can offload whatever investments they have made without making
losses due to unpredictable and randomly moving prices. In such a case, they would
rather invest elsewhere where they will know what returns they will get on their money. I
think the above discussion makes the importance of well-behaved prices to well
functioning primary markets amply clear .

- 60 -
HOW VOLATILE ARE OUR STOCK MARKETS?
This question can be reasonably answered only by looking at the facts. Hence, a look at
the data and graphs given is necessary. But as a precursor, let me tell you that stock
market volatility has been a cause of concern for policy makers as well as investors
throughout the world, and India is no exception.

Table 22: An Analysis of Volatility in our Stock Markets

Month/year Volatility (%)

S&P CNX Nifty Sensex

April 2008 1.96 2.17

May 2008 3.09 3.24

June 2008 5.11 5.26

July 2008 3.12 3.45

August 2008 2.57 2.66

September 2008 3.1 3.21

October 2008 1.81 1.93

November 2008 2.58 2.6

December 2008 2.69 2.85

January 2009 2.91 2.87

February 2009 1.79 1.7

March 2009 1.53 1.83

April 2009 3.31 3.3

May 2009 5.3 5.41

June 2009 2.59 2.41

July 2009 3.9 3.98

August 2009 3.19 2.78

- 61 -
September 2009 1.43 1.45

October 2009 2.09 2.11

November 2009 1.45 1.55

December 2010 1.43 1.63

January 2010 2.56 1.9

February 2010 1.84 2.51

March 2010 1.99 1.72

April 2010 3.51 3.93

May 2010 2.64 2.89

June 2010 1.48 1.5

July 2010 1.76 2.16

August 2010 1.07 1.16

September 2010 2.05 2.2

October 2010 1.59 1.62

November 2010 1.44 1.54

December 2010 1.42 1.53

January 2011 1.21 1.33

February 2011 1.58 1.8

March 2011 2.9 2.91

April 2011 2.23 2.42

May 2011 0.89 0.96

June 2011 1.27 1.24

July 2011 1.1 1.19

- 62 -
August 2011 0.57 0.66

September 2011 2.52 2.83

October 2011 1.21 1.46

November 2011 1.25 1.26

December 2011 1.22 1.36

January 2012 0.99 0.93

February 2012 1.48 1.51

March 2012 1.18 1.31

A suggestive summary of the above trends reveals that:

 June 08 and May 09 are two months when volatility was at its peak- volatility of both
the indices exceeded S%.

 After both these periods, volatility has been reasonably controlled due to the stringent
measures adopted by SEBI.

 'We also need to note that volatility was relatively higher for the first half of the period
i.e. till April 2010 and after that, the magnitude of the fluctuations tones down. This
indicates that we are moving towards more stable markets, even though very slowly.

 Another important fact is that by and large, the volatility of the Sensex is more than
that of the S&P CNX Nifty.

 In India, volatility across scrips varied widely. During the entire period, S&P IT Index
and S&P Petrochemicals Index have shown much higher volatility than S&P CNX Nifty
as a whole. The volatility of S&P Pharmaceuticals Index has been lower than that of
S&P CNX Nifty in general.

 A consoling fact is that both S&P CNX Nifty and the BSE Sensex are less volatile as
compared to Nasdaq 100.
Also, a study conducted by SEBI observed that for both BSE Sensex and S&P CNX Nifty,
intra-day volatility is less as compared to inter-day volatility. This is in conformity with
some of the studies about US, Japan and Hong Kong markets. The reason for this could
be that a large amount of information is likely to be accumulated overnight.

- 63 -
CHAPTER 6: LIMITATIONS

- 64 -
LIMITATIONS

The Bombay High Court in a recent judgment has ruled that the amendment to the Bombay Stock
Exchange (BSE) bye-laws on the limitation act will not be with retrospective effect.

In 1998, the BSE had amended the bye-laws and ushered in a new limitation act. As per the act,
claims on a transaction between a member and his client has to be referred to the arbitration
within three weeks. However, the exchange was silent on claims of transactions prior to the
amendment.

Challenging this, a BSE broker R C Goenka filed a petition in the court against its client, Chase
Trading Company, on transactions pertaining to 1993-94, on which the reference was filed only in
1999. The delay was mainly on account of fire which broke out in Goenka's office.

The issue before the court was whether the limitation act was applicable to transactions entered
prior to the amendment or not.
Advocates Sailesh Shah, Prakash Ganwani and Ravi Goenka appeared for the petitioner, R C
Goenka. According to the court ruling, the amendments to the bye-laws 252 (2) of the BSE will not
be operative from August 29, 1999 and will not cover transactions entered prior to the amendment.

Justice F I Rebello said in his judgment that there is nothing to indicate that the provisions would
be retrospective in character. On the contrary, on behalf of the BSE statement is made that they
will apply to transactions entered into as on August 29, 1998 when they came into force. The
provisions of the limitations became applicable as a term of the contracts after the amendment
was gazetted, October 20, 1998. Hence, the petition is allowed and impugned award is set aside,
according to the HC.

Disadvantages of Stock Market Investment

1. Volatile Investments
Investment in BSE is subjected to many risks since the market is volatile. The shares of a
company go up and come down so many times in just a single day. These price fluctuations are
unpredictable most of the times and the investor sometimes have to face severe loss due to
such uncertainty.

2. Brokerage Commissions Kill Profit Margin

Every time an investor buys or sells his shares, he has to pay some amount as a brokerage
commission to the broker, which kills the profit margin.

3. Time Consuming
Investment in NSE is not as easy as investing in a lottery as you have to complete many
formalities in the process and hence is time consuming.

- 65 -
CHAPTER 7: Recommendations & Conclusions

- 66 -
 Recommendations

1.Reduction of risk in Volatile Investments.

2.Reduce the Brokerage Commission to increase Profit margins of the investors.

3.Reduce the time consumed for investing in NSE to make things more convenient for the
investors.

Conclusion

Impact on Indian Economy

1.Deregulation In India During These Tough Times

2.Inflation Continues To Fall Back
3.Inflation Screeches To A Halt
4.Interest Rates Coming Down and Monetary System Stabilising
5.Rupee Rises Slightly
6.Stocks Start To Tick Up Again
7.Not Much Sign Of A Rebound In Commodities Yet
8.India's Foreign Exchange Reserves Continue to Fall
9.India's Industry Resists The Global Slowdown
10.Credit Tightening Continues as Inflation Falls Back Steadily
11.Oil and Commodities Continue To Fall.
12.India's Ship IS Battered By The Global Storm
13.Emerging Market Stocks
14.Inflation Falls
15.Commodities Down,Stocks Down
16.India's Industrial Output Weakens Too
17.Current Account and Trade Deficit

- 67 -
CHAPTER 8 : APPENDICES

- 68 -
 SURVEY RESULTS
Objective of the survey
The survey was intended to study the nature of risk, which is of most concern to individual
investors, effectiveness of index futures in above risk curtailment and importance of derivative
product in India.

Target population
Sample size comprises of individual investors who are actively participating in stock market and
those who have fair knowledge of derivative products

The number of people studied were 100.

Results

Most Important risk Number of responses

Volatility of prices 56

Liquidity 24

Interest rate changes 12

Any other 8

Thus to individual investors most important risk is volatility of prices. This is expected as every
investors like gain handsomely but fears of losing in that proportion too.

Success of index futures in respective risk No of Responses

curtailment

Successful 36

Unsuccessful 55

No Response 9

- 69 -
Individual investors believe that index futures have been unsuccessful in achieving their specific
risk curtailment. The probable reason could be that although individual investors want volatility of
prices to reduce, they do not want it at the expense of high gains.

Importance of derivative product in India No of people

Important 56

Not important 34

No Response 10

Most of the investors believe that derivative is important in India and that to mainly for hedging.
There are other reasons in addition to above such as up gradation of capital market, improvement
of economic viability etc. However there is one view that could be interesting is that derivative are
not meant for small investors.

Other important derivative product for No of responses

introduction in India

Stock Index options 66

Futures on individual stocks 12

Options on individual stocks 14

No Response 8

Most of the investors prefer index-based options. This is in consistent with investors concern for
volatility that is wanting upside potential but not downside loss. Another interesting result is very
low or nearly negligible preference for futures on individual stocks. The probable reason could be
existence of carry forward in Indian market, which is in many senses similar to futures on
individual stocks. Thus investors could be believing that introduction of futures on individual stocks
could be in some sense just repetition on carry forward.

Conclusion
For most of individual investors, volatility of prices is of most important concern but according to
them index futures have failed in above risk curtailment. There is no doubt in individual investors
mind about the importance of derivative product in India. Stock index options appear to be the
derivative product, which they would like to see in Indian market. Thus overall , it appears that
investors would like their risk to be curtailed but not at the expense of upside gains.

- 70 -
 APPENDIX : SURVEY QUESTIONNAIRE
1. Which risks are of most concern in your operations?

a. Volatility of Prices c. Interest Rate Changes

b. Liquidity d. Any other (Pl. Specify)

2. Are the present Index futures successful in above risk curtailment?

(Please list the risks that Index Futures curtails)

3. Do you think derivative products are important in India? (Please explain)

4. How effective index futures have been in achieving the roles as envisaged by SEBI.

5. Apart from Index futures, which of the following derivative products could be of use in
India?

a. Stock Index options c. Futures on Individual stocks

b. Options on individual stocks

6. What do you think SEBI should do to improve its acceptability?

7. Do you participate in index futures activity?

If yes, in what sense you are participating.

a. Hedgers d. Dealers/Speculators

b. Writers e. Any Other __________________

c. Broker

- 71 -
CHAPTER 9: BIBLIOGRAPHY & REFERENCES

- 72 -
Websites:
http://www.bseindia.com - [Bombay Stock Exchange]
http://www.uttoransen.com
http://www.indianeconomy.org
http://www.scribd.com
http://www.indianeconomywatch.blogspot.com
http://www.nseindia.com
http://www.sebi.com
http://www.geojitsecurities.com
http://www.nasscom.org - [NASSCOM]
http://www.infiapress.org

Books:

1.M.C Mehta (1946 ). Bombay Stock Exchange Year Book : BSE Publications.

2.G.s. Patel (1987). Stock Exchange In India – Emerging Scenario And Challenges : BSE
Publication.

- 73 -